Joint Costs and Decision Making.

State College Dairy can process 100 gallons of raw milk to yield any one of the following combinations of products:

a. 60 gallons of skim milk, 20 gallons of 2% milk, and 20 gallons of whole milk.

b. 30 gallons of skim milk, 30 gallons of 2% milk, and 40 gallons of whole milk.

In addition, the company has the alternative of converting whole milk, after it is separated from its sister products, into an equal number of gallons of chocolate milk at a cost of $0.125 per gallon.

Sales prices are $2.00 per gallon of skim milk, $1.875 per gallon of 2% milk, $2.125 per gallon of whole milk, and $2.30 per gallon of chocolate milk. Raw milk costs $80.00 per 100 gallons, and processing costs are $50 for combination

(a) and $60 for combination (b).

Required:

a. Determine the most profitable combination of products to produce from the basic material.

b. Would you produce the combination selected if chocolate milk could be sold for:

1.o$2.125?

2EOS225? 3. $2.50?

LO.1