Question

In: Accounting

Wholesome Dairy processes milk. The cost of the milk processing is $1,340,000. Wholesome is looking to...

Wholesome Dairy processes milk. The cost of the milk processing is $1,340,000. Wholesome is looking to increase its net income and is exploring the possibility of expanding its products to include cream and/or ice cream. It takes 1 gallon of milk to make a half gallon of ice cream

Product

Units Produced

Selling Price

Additional Processing costs

Milk

804,000

gallons

$

3.06

per gallon

Ice Cream

?

6.16

per half gallon

$

0.29

per half gallon

Required:

1. How many half gallons of ice cream can Wholesome make?

2. What are the additional processing costs to convert the milk to ice cream?

3. Should Wholesome sell the milk or process it further and sell ice cream?

Expert Solution

Ans:

1) Computation of Quantity of Half Gallon icecream

Milk Produced Unit

804000

Milk Required to produced half gallon of Icecream

1 Gallon

No. of Half gallon of Ice Cream can be produced (804000/1)

$804,000

Part-2
Additional processing Cost to Convert Milk to icecream	0.29 per Half Gallon
No. of Half gallon of Ice Cream can be produced	$804,000
Total Additional Cost to convert milk to Incecream (804000*0.29)	$233,160

Part-3
Revenue from Sale of Icecream 6.16*804000)	$4,952,640
Additional Cost to Convert milk to icecream	$233,160
NRV of selling Icecream (a)(4952640-233160)	$4,719,480
Revenue from Sale of Milk without processing (804000*3.06) (b)	$2,460,240
Differential (a-b)	-$2,259,240

It should not sell milk by further processing in icecream .

Hope this helped ! Let me know in case of any queries.

ekkarill92 answered 2 years ago

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