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		1.65
Profit per pound	$	0.75

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 $3.60 per pound, and the New York cut can be sold for $3.10 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.

1 pound = 16 ounces

1 pound T-bone will result in 6 ounce

1 pound Filet mignon and 8 ounce New York cut

1 pound Filet Mignon will require 2.7 pound T-bone

selling price = 2.4

1 pound = 16 ounces

1 pound T-bone will result in 6 ounce

sold at =3.60

1 pound Filet Mignon will require = 3.60-2.40*6/16

= 2.7

1 pound New York cut will require 1.6 pound T-bone

selling price = 2.4

1 pound = 16 ounces

sold at =3.10

1 pound Filet mignon and 8 ounce New York cut

1 pound New York cut will require = 3.10 - 2.40*8/16

= 1.9

Rest will be wastage

so total profit of selling 2.7 ounce of T-bone will be 2.7*.75 = 2.025

equivalent quantity of filet mignon and new york cut will generate profit of (3.60+3.10) - (2.7*.16) - (2.7*1.65)

= 1.813

Therefore it is profitable to sell after further processing

2.Yes, the T-bone steaks could be further processed into filet mignon and New York cut steaks. Cutting one side of a T-bone steak provides the filet mignon, and cutting the other side provides the New York cut.