Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat
ID: 2342448 • Letter: P
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:
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 $0.14 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 $3.20 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?
What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Advantage or Disadvantage _________________
_______ in Units
2. Would you recommend that the T-bone steaks be sold as initially cut or processed further?
Selling price ($2.40 per pound) $ 2.40 Less joint costs incurred up to the split-off point whereT-bone steak can be identified as a separate product 1.60 Profit per pound $ 0.80
Explanation / Answer
1.
Answer: Advantage
calculation of 1pound T- bone Steaks when processed further:
profit from 6 ounce filet mignon = 6*4/16 = $1.5
profit from 8 ounce New York cut= 8*3.2/16 = $1.6
cost of further procesing 1 pound t bone steaks= $0.14
Net profit 1 pound t bone steaks when processed =1.5+1.6-0.14 = $2.96
Profit 1 pound t bone steaks when not processed= $0.80
Advantage per unit = 2.96-0.8 = $ 2.16
2. T-bone steaks should be processed further