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 ($7.95 per pound) $ 7.95
Less joint costs incurred up to the split-off point where
T-bone steak can be identified as a separate product 3.80
Profit per pound $ 4.15
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 $0.55 to further process one T-bone steak into the filet mignon and New York cuts. The filet mignon can be sold for $12.00 per pound, and the New York cut can be sold for $8.80 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:

Instructions are listed below.

Explanation:

Giving the following information:

1 Pound T-bone:

Selling price ($7.95 per pound) $ 7.95

Joint costs= $3.80

Profit per pound $ 4.15

Further process:

It costs $0.55 to further process one T-bone steak.

6-ounce filet mignon and one 8-ounce New York cut.

The filet mignon can be sold for $12.00 per pound, and the New York cut can be sold for $8.80 per pound.

A) Filet mignon: $12.00 pound

1 ounce= 16 ounce

0.375= 6 ounce

Price= 0.375*12= $4.5

New York cut= $8.80 a pound

Price= 0.5*8.80= $4.4

Sales= 4.5+4.4= $8.9

Costs= 3.80 + 0.55= 4.35

Profit= $4.55

B) It is more profitable to further process the T-bone stake by $0.40.