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		1.35
Profit per pound	$	1.05

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 $4.00 per pound, and the New York cut can be sold for $3.40 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

Answer:

Revenue from Further Processing = one filet mignon Sale price + New York cut Sale price                                                                =    (6 ounce x $4 / 16 )   + (8 ounce x $3.40 / 16 )                                                                =     $1.50 + $1.70                                                                =       $3.20

a)

Finanacial Advantage = Revenue from Further Processing (-) Selling price (-) Additional Costs                                               =    $3.20 (-) $2.40 (-) $0.16                                               =    $0.64

b)

Yes, T-bone steaks Should be processed further as there is a financial Advantage of $0.64