But wait, you say, wouldn't the regulations, especially § 205.301 simplified above, prohibit this?
The regulations refer to the "final product" being comprised of ≥X% of organically produced ingredients. This way, the measurement of weight would see component A as being the 95% organic part of the product. Component A as seen in the initial diagram may have its own subcomponents X, Y, Z.
Back to the question of what defines organically produced?
You can look at Subpart C. I have consulted the National Organic Program's agents and they have confirmed that
determination is also dependent on the percentage of the components of that ingredient.
Oh no, so my food is being contaminated!
Ye olde USDA hasn't failed you yet. In the same regulation, non-organics cannot be present in 100% Organic labeled and Organic labeled foods unless they are listed under §205.606, a list of exceptions. When they are present, the label may only say "Made with".
Euler's Organics Model only applies when ingredients of a product are made up of subcomponents. It usually only goes down about 1-2 levels because sooner or later, the subcomponents are raw materials such a tomato or pepper.
The tomato and pepper are 100% organic or nonorganic produce depending on where they are grown. Organic produce, raw materials, are grown according to Subpart C.
This said, you should continue feeling safe when buying organic foods since the Euler's Organics Model only applies to certain organic labels.
If you want, you can read the entire Part 205 — National Organic Program on the Electronic Code of Federal Regulations (e-CFR).