Problem 12-20 Sell or Process Further [LO12-7] (Prepared from a situation sugges
ID: 2543560 • Letter: P
Question
Problem 12-20 Sell or Process Further [LO12-7] (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) Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product $2.50 1.30 $1.20 Profit per pound 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 $0.15 per pound. The filet mignon can be sold for $4.40 per pound, and the New York cut can be sold for $3.20 per pound.Explanation / Answer
1) Determine incremental profit :
2) T-bone steaks should be processed further.
Sales from further processing : Sales price of one filet mignon 4.40 Sale price of one new york cut 3.20 Total revenue from further processing 7.60 Less Sales revenue from one T-bone Steak (2.50) Incremental revenue from further processing 5.10 Less Cost of further processing (0.15) Profit (loss) per pound from further processing 4.95