Question

The Pig Case

Suppose that there was a one person butcher shop where each day, for $300, the butcher could buy an identical pig weighing 200 pounds. Each 200 pound pig can be cut into the following five products: Selling Price per pound Weight (a) Pork Chops $ 4.00 30 pounds (b) Ham 3.00 50 pounds (c) Bacon 1.60 100 pounds (d) Pig's Feet 1.00 15 pounds (e) Hide 10.00 5 pounds 200 pounds

Required: 1. Compute the financial accounting gross profit for the butcher shop for the first day, assuming everything is sold.

2. Allocate the cost of the pig to each of the five products based on their relative weights (e.g., 30/200 to pork chops). Compute the gross profit for each of the five products.

3. Repeat requirement #2 for day #2. If any of the products had a negative gross profit in the previous day, throw out that product immediately. Sell only the remaining products. Allocate the pig's cost to the remaining products based on the relative weights of those products.

4. Repeat requirement #3 for days 3 through 6.

5. Explain what is going on.

Answer 1

1 & 2.

Day1
	Total	Pork Chops	Ham	Bacon	Feet	Hide
Weight(Pounds)	200	30	50	100	15	5
Selling Price per pound		4	3	1.6	1	10
Revenue	495	120	150	160	15	50
Cost	300	45	75	150	22.5	7.5
(Allocated based on weight)
Gross profit	195	75	75	10	-7.5	42.5
Since Feet is giving negative profit we stop selling feet on day 2.

3.

Day2
	Total	Pork Chops	Ham	Bacon	Feet	Hide
Weight(Pounds)	185	30	50	100	0	5
Selling Price per pound		4	3	1.6	1	10
Revenue	480	120	150	160	0	50
Cost	300	49	81	162	0	8
(Allocated based on weight)
Gross profit	180	71	69	-2	0	42
Since Bacon is giving negative profit we stop selling Bacon on day 3.

4.

Day3
	Total	Pork Chops	Ham	Bacon	Feet	Hide
Weight(Pounds)	85	30	50	0	0	5
Selling Price per pound		4	3	1.6	1	10
Revenue	320	120	150	0	0	50
Cost	300	106	176	0	0	18
(Allocated based on weight)
Gross profit	20	14	-26	0	0	32
Since Ham is giving negative profit we stop selling Ham on day 4.

Day4
	Total	Pork Chops	Ham	Bacon	Feet	Hide
Weight(Pounds)	35	30	0	0	0	5
Selling Price per pound		4	3	1.6	1	10
Revenue	170	120	0	0	0	50
Cost	300	257	0	0	0	43
(Allocated based on weight)
Gross profit	-130	-137	0	0	0	7
Since Pork chops is giving negative profit we stop selling Pork chops on day 5.

Day5
	Total	Pork Chops	Ham	Bacon	Feet	Hide
Weight(Pounds)	5	0	0	0	0	5
Selling Price per pound		4	3	1.6	1	10
Revenue	50	0	0	0	0	50
Cost	300	0	0	0	0	300
(Allocated based on weight)
Gross profit	-250	0	0	0	0	-250
Since he is not making any profit the butcher will stop doing the business.

5.

As the sale of unprofitable products is being eliminated, the cost of the pig is being reallocated to the remaining parts, resulting in increasing the cost of the parts (sine we are allocating the cost based on the weight of the products, the cost absorbed by the loss making product gets redistributed among the profitable products).

This results in making the one of the remaining products loss making , and as we proceed in this procedure, on the sixth day the butcher will not have any thing to sell.

The better way is to sell all the parts which we get, so that we can at least realise some cost from the loss making products, so that the business gives the optimum returns. This can be seen from the way the total profit has resulted,(On the first day the total profit is $195 which will be a loss of $250 by the fifth day).

We can see that , on the first day although "FEET" is giving a loss of $7.50 , the product is absorbing the cost of $15 (Revenue from Feet). Otherwise the total cost of $22.50 will be borne by the other products, which has resluted in a reduced profits of $180 on Day 2 and resulting in Bacon becoming the next unprofitable product.

Therefore , once the cost of the pig is incurred, it is better to sell all the products derived from it so as to maximise the profit.