Question

(Prepared from a situation suggested by Professor John W. Hardy) Lone Star Meat Packers is a major processor of beef and other meat products. The company has a large amount of T-bone steak on hand, and it is trying to decide whether to sell the T-bone steaks as they are initially cut or to process them further into filet mignon and the New York cut. If the T-bone steaks are sold as initially cut the company figures that a 1-pound T-bone steak would yield the following profit Selling price ($2.40 per pound) Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product $2.40 1.35 Profit per pound $ 1.05 As mentioned above, instead of being sold as initially cut, the T-bone steaks could be further processed into filet mignon and New York cut steaks. Cutting one side of a T-bone steak provides the filet mignon, and cutting the other side provides the New York cut. One 16-ounce T-bone steak cut in this way will yield one 6-ounce filet mignon and one 8-ounce New York cut; the remaining ounces are waste. The cost of processing the T-bone steaks into these cuts is $0.12 per pound. The filet mignon can be sold for $4.00 per pound, and the New York cut can be sold for $3.50 per pound. Required: 1. Determine the profit per pound from processing the T-bone steaks into filet mignon and New York cut steaks. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Per 16-Ounce T-Bone Sales from further processing: Sales price of one filet mignon Sales price of one New York cut 0.00 Total revenue from further processing Less sales revenue from one T-bone steak Incremental revenue from further processing Less cost of further processing Profit(loss) per pound from further processing 0.00 $ 0.00

Answer 1

	Per 16 ounce
Sales from further processing
Sale Price of one filet mignon	1.5
Sale price of one new york cut	1.75
Total revenue from further processing	3.25
Less: Sales revenue from one t-bone steak	2.4
Incremental revenue	0.85
Less: cost of further processing	0.12
Profit per pound	0.73
Note: Joint cost is a sunk cost and hence not relevant
	Product A	B	C
Contribution Margin per unit	34	16.25	22.5
Material per unit	8.5	6.5	1.75
Contribution Margin per pound	4	2.5	12.85714286
Rank	Second	Third	First

D Per 16 ounce 2 Sales from further processing 3 Sale Price of one filet mignon 4 Sale price of one new york cut 5 Total revenue from further processing =4*6/16 =3.5*8/16 |=SUM(B3:B4) 6 Less: Sales revenue from one t-bone steak 2.4 7 Increamental revenue =B5-B6 8 Less: cost of further processing 0.12 9 Profit per pound =B7-B8 10 Note: Joint cost is a sunk cost and hence not relevant 11 Product A 12 13 Contribution Margin per unit 14 Material per unit 15 Contribution Margin per pound 34 22.5 16.25 =19.5/3 =C13/C14 =D13/D14 Third =25.5/3 =B13/B14 =5.25/3 16 Rank Second First 17