Question

Problem 12-20 Sell or Process Further Decision [LO12-7]

(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 ($2.40 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		1.30
Profit per pound	$	1.10

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 $0.17 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 $3.90 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:

	Per T-bone (16-Ounces)
Sales from Further processing:
Sale Price of one Filet Mignon ($3.60*6/16)	$1.35
Sale Price of one new York Cut ($3.90*8/16	$1.95
Total revenue From Further processing	$3.30
Less: Sales Revenue from one T-Bone Steak	$2.40
Incremental revenue from Further Processing	$0.90
Less: cost of further processing	$0.17
Financial advantage (disadvantage) of futher processing one T-Bone steak	$0.73

Solution 2:

T-Bone Steaks be sold as processed further as there is financial advantage of $0.73 per T-Bone steak.