Question

NaturalMaid processes organic milk into plain yogurt. NaturalMaid sells plain yogurt to hospitals, nursing homes, and restaurants in bulk, one-gallon containers. Each batch, processed at a cost of \(840, yields 300 gallons of plain yogurt. NaturalMaid sells the one-gallon tubs for \)5 each and spends \(0.14 for each plastic tub. NaturalMaid has recently begun to reconsider its strategy. NaturalMaid wonders if it would be more profitable to sell individual-size portions of fruited organic yogurt at local food stores. NaturalMaid could further process each batch of plain yogurt into 6,400 individual portions (3/4 cup each) of fruited yogurt. A recent market analysis indicates that demand for the product exists. NaturalMaid would sell each individual portion for \)0.58. Packaging would cost \(0.10 per portion, and fruit would cost \)0.11 per portion. Fixed costs would not change.

Should NaturalMaid continue to sell only the gallon-size plain yogurt (sell as is) or convert the plain yogurt into individual-size portions of fruited yogurt (process further)? Why?

Short answer

Thecompany should convert plain yogurt into individual-sized portions of fruited yogurt.

Step-by-step solution

Importance of Differential Analysis

Differential analysis is a technique that helps business entities to make important decisions. This technique enables abusiness to present the pros and cons associated with a particular decision inmonetary terms.

 Step 2: Preparation of differential analysis 

Particulars	Sell as in ($)	Convert ($)	Difference ($)
Total units	300	6,400	(6,100)
Revenue per unit	5	1	4
Less: Packaging cost per unit	0.14	0.10	(6,096)
Fruit cost	0	0.11	0
Contribution margin	4.86	0.37	4
Total contribution	$1,458	$2,368	($910)

Decision

Based on the analysis above, the company should process the plain yogurt further because it will increase the contribution margin by $910.