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		1.45
Profit per pound	$	0.85

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 $4.00 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

1.)	Sales revenue
	Onefileted Mignon	=( Selling price per fileted Mignon x yeild per ounce )/ Size of one T-bonesteak
		= ( 4 x 6 ) / 16
		= $1.50
	Newyorkcut	=( Selling price per newyork cut x yeild per ounce )/ Size of one T-bonesteak
		= ( 3.9 x 8 ) / 16
		= $1.95

		Amount $
	Total Sales from Further processing	3.45	( 1.5 + 1.95 )
	Less: Further processing Cost	0.15
	Less: Sales revenue lost of One T-bone steak	2.30
	Financial advantage from further processing	1.00

2.)	The T-bone steaks should be sold after further processing as there is Financial advantage from further processing of $ 1.00.