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		1.70
Profit per pound	$	0.50

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 $0.16 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 $3.20 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

1)
Answer:
1)
	Per 16-Ounce T-Bone
Sales from further processing:
Sales price of one filet mignon                        (6 ounce x $ 4 per pound / 16 )	$ 1.50
Sales price of one New York cut                 (8 ounce x $ 3.20 per pound / 16 )	$ 1.60
Total Sales from further processing	$ 3.10
Less :   Selling Price	($ 2.20)
Incremental revenue from further processing	$ 0.90
Less : Cost of further processing	($ 0.16)
Financial advantage of further Processing	$ 0.74 per unit
2)
Since Financial advantage of $0.74 per unit T-bone steaks should be processed further