Sell or process further: Kraft, Inc. produces milk at a total cost of $66,000. T

Question

Sell or process further:

Kraft, Inc. produces milk at a total cost of $66,000. The production generates 60,000 gallons of milk which can be sold for $1 per gallon to a pasteurization company, or the milk can be processed further into ice cream and then sold for $2.50 per gallon. It costs $75,000 more to turn the annual milk supply into ice cream.

Instructions

If Kraft processes the milk into ice cream, how much is the incremental profit or loss? Should Kraft process the milk into ice cream or sell it as is?

Explanation / Answer

Cost Revenue Profit Producing Milk 66000 60000 -6000    Reenue = 60000 gallon x $ 1 Processing cost in icecream 75000 Total cost of producing ice cream 141000 150000 9000 Revenue from ice cream = 60000 gallon x $ 2.5 Increment Profit will be = Profit earned after ice cream = 9000    Add: Loss covered on milk = 6000 Increment Profit will be = 15000 Yes Kraft must process the milk into ice cream and sell it as ice cream

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