Structuring the Sell-or-Process-Further Decision

Barts Butters receives 1,000,000 containers of raw milk each period that it subsequently processes into consumable milk by adjusting the fat content, adding vitamins, and destroying any potentially harmful bacteria. For Barts, one container equals one gallon of consumable milk. Barts then must decide whether to sell its consumable milk at split-off or to process it further into butter. Barts normally sells consumable milk for a per-gallon price of $3. Alternately, each gallon of milk can be processed further into one-half tub of butter (i.e., one gallon of milk equals 0.5 gallon of butter) at an additional cost of $1.50 per tub of butter. Also, butter can be sold for $6.00 per tub.

Required:

1. What is the contribution to income from selling the consumable milk? $

2. What is the contribution to income from processing the consumable milk into butter? $

3. Should Barts continue to sell the consumable milk or process it further into butter?