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 2.40 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 1.55 Profit per pound $ 0.85 If the company were to further process the T-bone steaks, then 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. It costs $0.16 to further process one T-bone steak into the filet mignon and New York cuts. 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. What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks? 2. Would you recommend that the T-bone steaks be sold as initially cut or processed further?

Answer 1

1) Financial advantage is $.69 per pound
2) Process further
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Please find below the answer
Particulars	Filet Mignon	New york cut	Total
Selling price per pound after further processing	4.00	3.50
No of pounds from 1 pound Filet =6/16 New york cut = 8/16	0.375	0.500
Revenue from 1 pound of T Bone steak	1.50	1.75	3.25
Sales revenue at split off point			2.40
Total Incremental Revenue per pound	-	-	0.85
Total Incremental Processing costs			0.16
Total Incremental profit or loss	-	-	0.69