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 ($2.50 per pound) $ 2.50 Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product 1.40 Profit per pound $ 1.10 As mentioned above, instead of being sold as initially cut, 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. 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. The cost of processing the T-bone steaks into these cuts is $0.17 per pound. The filet mignon can be sold for $3.60 per pound, and the New York cut can be sold for $3.70 per pound.

Required: 1. Determine the profit per pound from processing the T-bone steaks into filet mignon and New York cut steaks. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Per 16 ounce t bone

Sales from further processing:

Sales price of one filet mignon

Sales price of one New York cut

Total revenue from further processing

Less sales revenue from one T-bone steak

Incremental revenue from further processing

Less cost of further processing

Profit(loss) per pound from further processing

2. Would you recommend that the T-bone steaks be sold as initially cut or processed further? T-bone steaks should be processed further. T-bone steaks should be sold as initially cut.

Answer 1

Answer 1.
	Per 16 Ounce T Bone
Revenue From Further Processing:
Selling Price one Filet Mignon - 6 Ounces X $3.60 per pound / 16 ounces per pound)	1.35
Selling Price one Cut - 8 Ounces X $3.70 per pound / 16 ounces per pound)	1.85
Total Revenue from further Processing	3.20
Less: Revenue from one T Bone Stick	(2.50)
Incremental Revenue from further processing	0.70
Less: Cost of further Processing	0.17
Profit per pound from further processing	0.53
	.
Answer 2.
Yes, T Bone steak should be further processed into Filet Mignon and One Cut as it will increase the profit per pound by $0.53.