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 ($2.30 per pound)$2.30

Less joint costs incurred up to the split-off point where
T-bone steak can be identified as a separate product 1.40

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 $0.19 to further process one T-bone steak into the filet mignon and New York cuts. The filet mignon can be sold for $4.40 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

Here joint cost is not relevant as it will be incurred in both the situation.(T -steaks or filet mignon and New York cut steaks)

1 pound = 16ounces

	T bone	Further processing	Increase (decrease) in net income per pound
sales	$2.30	$3.4[$4.40/16 ounces*6ounces]+[$3.50/16 ounces*8 ounce]	$1.1
cost	-	$0.19	($0.19)
Incremental profit			$0.91 per pound

2. T-bone steaks should be processed further as there is an incremental net income of $0.91 per T-bone.

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