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 Profit per pound 1.55 $ 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

Profit Before Further Process Particulars 1 Selling Price 2 Joint cost 3 Profit per pound(1-2) Sno Amount 2.4 1.55 0.85 Required 1 Profit After Further Process filet mignon New York cut Sno Particulars Yield 1 Selling Price per pound 2 Joint cost in ratio of yield 6:8 [(1.55*6/14);(1.55*8/14)] 6 ounce 8 ounce 4 3.5 0.66 0.89 3 Further process cost in ratio of yield 6:8 0.07 0.09 [(.16*6/14);(.16*8/14)] 4 Profit per pound(1-2-3) 3.27 2.52 Required 2 T bone steaks should be further process as it gives higher profit