Question

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 ($2.40 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

As mentioned above, instead of being sold as initially cut, the T-bone steaks could be further processed into filet mignon and New York cut steaks. 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. The cost of processing the T-bone steaks into these cuts is $0.14 per pound. The filet mignon can be sold for $4.40 per pound, and the New York cut can be sold for $3.40 per pound.

Required:

1. Determine the profit per pound from processing the T-bone steaks into filet mignon and New York cut steaks. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Per 16-Ounce T-Bone
Sales from further processing:
Sales price of one filet mignon
Sales price of one New York cut
Total revenue from further processing
Less sales revenue from one T-bone steak
Incremental revenue from further processing
Less cost of further processing
Profit(loss) per pound from further processing

2. Would you recommend that the T-bone steaks be sold as initially cut or processed further?

	T-bone steaks should be processed further.
	T-bone steaks should be sold as initially cut.

Answer 1

	Per 16-Ounce T-Bone
Sales from further processing:
Sales price of one filet mignon	1.65	=4.4/16*6
Sales price of one New York cut	1.7	=3.4/16*8
Total revenue from further processing	3.35
Less sales revenue from one T-bone steak	2.4
Incremental revenue from further processing	0.95
Less cost of further processing	0.14
Profit per pound from further processing	0.81
2
T-bone steaks should be processed further.