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 ($2.20 per pound)	$	2.20
Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product		1.25
Profit per pound	$	0.95

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 $0.19 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

1.

Particulars	Filet Mignon	New york cut	Total
Selling price per pound after further processing	3.60	3.30
No of pounds from 1 pound
Filet =6/16	0.375
New york cut = 8/16		0.50
Revenue from 1 pound of T Bone steak	1.35	1.65	3.00
Sales revenue at split off point			2.20
Total Incremental Revenue per pound			0.80
Total Incremental Processing costs			0.19
Total Incremental profit or loss			0.61

Financial advantage is 0.61 per pound

2.

It should be processed further since processing further increases the profits.