I definitely wouldn't write it the way you have in the question - that was really hard to figure out.
First off, I'd chose different words to make it clearer what's dialogue and what's narration. Then I think I'd break the section up with more narration. Something like:
X frowned at Y, clearly tired of the conversation already. "Fine. I'll
say it once more. We were standing there on the sidewalk outside the
grocery store, and B said, 'I like apples.' But you know C couldn't
agree about the sky being blue, so he was all, 'I prefer oranges.'" X
had made his voice deep and manly when repeating B's words, high and
prissy for C's.
"But B's always got to try to make peace, right?" X waited for Y's nod
of understanding, then continued. "So B said, 'Well, what about
plums?' and I swear, they talked about fruit for another five minutes,
Maybe you were just using a simplified version of the dialogue in order to ask the spacing question, in which case - no, I wouldn't use that spacing. But the larger answer I'd give would be to use more words to make it all more clear. Punctuation and spacing are important, but they can't work miracles.