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 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 ($2.50 per pound)	$	2.50
Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product		1.20
Profit per pound	$	1.30

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 $0.14 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 $3.60 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

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 ($3.60*8/16)	$1.80
Total revenue from further processing	$3.30
Less: sales revenue from one t-bone steak	$2.50
Incremental revenue from further processing	$0.80
Less: Cost of further processing	$0.14
Profit / (Loss) per pound from further processing	$0.66

Solution 2:

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