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:

Selling price ($2.20 per pound)	$	2.20
Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product		1.45
Profit per pound	$	0.75

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 $0.15 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

	Per 16-Ounce T-Bone
Sales from further processing:
Sales price of one filet mignon	1.35	=3.6/16*6
Sales price of one New York cut	1.75	=3.5/16*8
Total revenue from further processing	3.1
Less sales revenue from one T-bone steak	2.2
Incremental revenue from further processing	0.9
Less cost of further processing	0.15
Profit per pound from further processing	0.75
The T-bone steaks should be processed further into the filet mignon