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 1.30 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 $0.17 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 $3.30 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 a
	1 Pound=	16 Ounce
		Filet Mignon	Net York Cut	Total
	Yield in ounce	6	8
	Price in pound	$          3.60	$           3.30
	Selling revenue	3.60*6/16	3.30*8/16
	Selling revenue	$          1.35	$           1.65	$      3.00
	Selling revenue without processing			$      2.30
	Incremental revenue			$      0.70
	Incremental cost			$      0.17
	Incremental profit			$      0.53
Solution b
	As we can see that the 1 pound of Steak generated an additional net profit of $ 0.53 if processed further, it is suggested to process further and then sell.