-Bill has just returned from a duck hunting trip. He has brought home eight duck
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Question
-Bill has just returned from a duck hunting trip. He has brought home eight ducks. Bill’s friend, John, disapproves of duck hunting, and to discourage Bill from further hunting, John has presented him with the following cost estimate per duck:
Camper and equipment:
Cost, $15,800; usable for eight seasons; 10 hunting trips per season $ 197.50
Travel expense (pickup truck):
100 miles at $0.46 per mile (gas, oil, and tires—$0.28 per mile; depreciation and insurance —$0.18 per mile) 46.00
Shotgun shells (two boxes) 35.00
Boat:
Cost, $2,720, usable for eight seasons; 10 hunting trips per season 34.00
Hunting license:
Cost, $60 for the season; 10 hunting trips per season 6.00
Money lost playing poker:
Loss, $20 (Bill plays poker every weekend) 20.00
Bottle of whiskey:
Cost, $15 (used to ward off the cold) 15.00
Total cost $ 353.50
Cost per duck ($353.50 ÷ 8 ducks) $ 44.19
Required:
1.
Assuming that the duck hunting trip Bill has just completed is typical, what costs are relevant to a decision as to whether Bill should go duck hunting again this season?
2.
Suppose that Bill gets lucky on his next hunting trip and shoots 10 ducks in the amount of time it took him to shoot 8 ducks on his last trip. How much would it have cost him to shoot the last two ducks?
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(Prepared from a situation suggested by Professor John W. Hardy.) Granite City 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 ($4.20 per pound) $ 4.20
Less joint costs incurred up to the split-off point where
T-bone steak can be identified as a separate product 3.55
Profit per pound $ 0.65
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. One 16-ounce T-bone steak cut in this way will yield one 4-ounce filet mignon and one 10-ounce New York cut; the remaining ounces are waste. The cost of processing the T-bone steaks into these cuts is $0.26 per pound. The filet mignon can be sold for $6.60 per pound, and the New York cut can be sold wholesale for $5.20 per pound.
Required:
1.
Determine the profit per pound from processing the T-bone steaks further into filet mignon and New York cut steaks. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
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
1. The relevant costs for a decision as to whether Bill should go duck hunting again this season are: the gas, oil, and tires @ $0.28 per mile in the travel expense; shotgun shells; and the cost of a bottle of whiskey. These costs will only be incurred if Bill goes duck hunting again and hence are relevant to the decision.
The camper and equipment cost, depreciation and insurance of pickup truck, boat cost, and cost of hunting license are all already incurred sunk costs and hence irrelevant.
Money lost playing poker is also an irrelevant cost since it remains constant irrespective of the decision and will be incurred whether Bill goes hunting or stays at home.
2. The cost to Bill to shoot the last two ducks will be nil as he will not incur any additional cost for shooting the ducks. The only relevant cost with respect to the number of ducks shot is the shotgun shells however, since that remains the same, there is no extra cost for shooting the last two ducks.
Per Chegg guidelines, please post independent questions separately. Thank you.
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