Question

one 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: Selling price ($2.40 per pound) $ 2.40 Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product 1.50 Profit per pound $ 0.90 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 $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

Answer 1:

Financial advantage = $ 0.52 per unit

Statement of Comparative Cost
Sale initially	Amount	Process further	Amount
Sale Price	$   2.40	Sale Price of filet mignon (3.6/16*6)	$   1.35
Joint Cost	$ (1.50)	Sale Price of New York cut (3.5/16*8)	$   1.75
		Joint Cost	$ (1.50)
		Further processing cost	$ (0.18)
Net Profit	$   0.90	Net Profit	$   1.42
Financial advantage	$   0.52	per unit

Answer 2:

T-bone steaks should be processed further.

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