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: $ 2.10 Selling price ($2.10 per pound) Less joint costs incurred up to the aplit-off point where T-bone steak can be identified as a separate product Profit per pound 1.45 $ 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 8-ounce New York cut; the remaining ounces are waste. It costs $0.18 to further process one T-bone steak into the filet mignon and New York cuts. The filet mignon can be sold for $3.60 per pound, and the New York cut can be sold for $2.90 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 answers to 2 decimal places.) per unit

Answer 1

Financial advantage of processing = Sales Value after processing – Sales Value before processing – Additional cost of processing

= 3.60*6/16 + 2.90*8/16 – 2.10 – 0.18

= $0.52

Yes, should be processed further, since there is advantage is positive

Note: Joint costs incurred are sunk costs and not relevant