Structuring the Sell-or-Process-Further Decision

Britney's Butters receives 2,000,000 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 Britney's, one container equals one gallon of consumable milk. Britney's then must decide whether to sell its consumable milk at split-off or to process it further into butter. Britney's normally sells consumable milk for a per-gallon price of $3.50. Alternately, each gallon of milk can be processed further into a tub of butter (all calculations use 1 gallon of milk equals 0.75 gallons of butter) at an additional cost of $3.00 per tub of butter. Also, butter can be sold for $7.00 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 Britney's continue to sell the consumable milk or process it further into butter?

Process the consumable milk into butter, Sell the consumable milk without processing, or Sell the consumable milk without processing