(Prepared from a situation suggested by Professor John W. Hardy.) Abilene Meat P

Question

(Prepared from a situation suggested by Professor John W. Hardy.) Abilene Meat Processing Corporation 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 is or to process them further into filet mignon and New York cut steaks.

Management believes that a 1-pound T-bone steak would yield the following profit:


Wholesale selling price ($2.25 per pound) $ 2.25
Less joint costs incurred up to the split-off point where
T-bone steak can be identified as a separate product 1.70

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Profit per pound $ 0.55

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As mentioned above, instead of being sold as is, 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. A one pound (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 $0.20 per pound. The filet mignon can be sold for $3.60 per pound, and the New York cut can be sold wholesale for $2.90 per pound.


Required:
1. Determine the profit per pound from processing the T-bone steaks further into filet mignon and New York cut steaks. (Loss amount should be indicated by minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)


Profit per pound from further processing $

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


T-bone steaks should be sold.
T-bone steaks should be processed further

Explanation / Answer

Recall 1 Pound = 16 Oz, Filet sale price $4.40/Lb & NY Cut is $3.30 /Lb SO 1 Lb T-Bone @$0.19 = 6 Oz Filet + 8 Oz NY Cut So 1Lb T-Bone will yield = (6/16)Lb Filet + (8/16)Lb NY CUt = (6/16)*$4.40 + (8/16)*$3.30 = $3.30 of Sales Rev Cost incurred is $1.35 at Splitoff + $0.19 in further processing = $1.54 SO Profit per Lb of T-Bone = $3.30 - $1.54 = $1.76

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