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 ($2.40 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		1.40
Profit per pound	$	1.00

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 $0.18 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 $3.70 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

Answer 1:

Financial advantage: $ 0.62 per unit

Calculation:

Statement of Comparative Cost
Sale initially	Amount	Process further	Amount
Sale Price	$   2.40	Sale Price of filet mignon	$   1.35
Joint Cost	$ (1.40)	Sale Price of New York cut	$   1.85
		Joint Cost	$ (1.40)
		Further processing cost	$ (0.18)
Net Profit	$   1.00	Net Profit	$   1.62
Financial advantage	$   0.62	per unit

Answer 2:

T-bone steaks should be processed further.

In case of any doubt, please feel free to comment.