Question

Problem 11-20 Sell or Process Further Decision [LO11-7 (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 tryling 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 ($2.10 per pound) Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product 2.1e 1.40 Profit per pound e.70 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 $0.17 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 1 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.) per unit Required 1 Required 2

Answer 1

Req 1.

calculation on further processing of T bone [ 1 pound = 16ounces]

		calculation
Selling price of 6 Ounces of Mingnon	$1.5	16 ounces=$4 6 ounces= ?
Selling price of 8 ounces of New york cut	$1.85	16 ounces =$3.70 8 ounces = ?
Total sell value of further processed product	$3.35
Less further processing cost	($0.17)
Net profit on further processing	$3.18	3.35-0.17
Less selling price of T bone foregone	$2.10
Incremental advantage(disadvantage) of further processing T bone	$1.08	incremental advantage [3.18-2.10]

Joint cost here is not relevant in decision making as it will occur in both the cases

answer $1.08 per unit

req.2

As the incremental profit is $1.08 per pound of T bone further processing, It is recommended to further process it into Mignon and new york cut.