Archie’s Apples grows organic apples and sells them to national grocery chains, local grocers, andmarkets. Archie purchased a machine for $450,000 that sorts the apples by size. The largest applesare sold as loose apples to the various stores, the medium sized apples are bagged and sold tothe grocers in their bagged state, and the smallest apples are sold to deep discounters or to a localmanufacturing plant that processes the apples into applesauce. Archie is considering keeping thesmall apples and processing them into apple juice that would be sold under Archie’s own label tolocal grocers. The small apples currently sell to the deep discounters and local manufacturers for$1.10 per dozen. The variable cost to prepare the small apples for sale, including transporting theapples, is $0.30 per dozen. Archie can sell each gallon of organic apple juice for $3.50 per gallon.It takes two dozen small apples to make one gallon of apple juice. The cost to produce the organicapple juice will be $0.60 variable cost per gallon plus $200,000 fixed costs for the one-year leaseof the equipment needed to make and bottle the juice. Archie normally harvests and sells 2,400,000small apples per year.Should Archie continue to sell the small apples to local grocers and the applesauce manufactureror should Archie process the apples further into organic apple juice?
Archie’s Apples grows organic apples and sells them to national grocery chains, local grocers, and
markets. Archie purchased a machine for $450,000 that sorts the apples by size. The largest apples
are sold as loose apples to the various stores, the medium sized apples are bagged and sold to
the grocers in their bagged state, and the smallest apples are sold to deep discounters or to a local
manufacturing plant that processes the apples into applesauce. Archie is considering keeping the
small apples and processing them into apple juice that would be sold under Archie’s own label to
local grocers. The small apples currently sell to the deep discounters and local manufacturers for
$1.10 per dozen. The variable cost to prepare the small apples for sale, including transporting the
apples, is $0.30 per dozen. Archie can sell each gallon of organic apple juice for $3.50 per gallon.
It takes two dozen small apples to make one gallon of apple juice. The cost to produce the organic
apple juice will be $0.60 variable cost per gallon plus $200,000 fixed costs for the one-year lease
of the equipment needed to make and bottle the juice. Archie normally harvests and sells 2,400,000
small apples per year.
Should Archie continue to sell the small apples to local grocers and the applesauce manufacturer
or should Archie process the apples further into organic apple juice?
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