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: $ 2.20 Selling price ($2.20 per pound) Les joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product Profit per pound 1.55 $ 0.65 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 B-ounce New York cut the remaining ounces are waste. It costs $0.12 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 $3.70 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? Complete this question by entering your answers in the tabs below. Required i Required 2 What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks? (Do not round Intermediate calculations. Round your answer to 2 decimal places.) Financial advantage s 0.95 per unit

Answer 1

Solution 1:

Particulars	Per 16 ounce T bones
Sales from further processing:
Sales price of one filet mignon ($4*6/16)	$1.50
Sales price of one new york cut ($3.70*8/16)	$1.85
Total revenue from further processing	$3.35
Less: sales revenue from one t-bone steak	$2.20
Incremental revenue from further processing	$1.15
Less: Cost of further processing	$0.12
Profit / (Loss) per pound from further processing	$1.03

Solution 2:

As there is net financial advantage, therefore T-bone steak should be processed further.