The San Ynez Cattle Company is a producer of fine beef products. The company has

Question

The San Ynez Cattle Company is a producer of fine beef products. The company has a large amount of T-bone steaks on hand, and is trying to decide wether to sell the T- bone steaks as they are or to process them further into filet mignon and New York cut steaks.

If the T-bone steaks are sold as they are, the company calculates that a one-pound T-bone steak will yield the following profit:

Selling Price: $8.50
Less: joint product cost 5.80
Profit per pound: $2.70

Instead of being sold as T-bone steaks the steaks can be processed further into filet mignon and New York cut steaks. By cutting up a 16-ounce T-bone steak, it will yield one 6-ounce filet mignon and one 8-ounce New York cut steak. The remaining 2-ounces (the bone) are waste. The cost of processing the T-bone steaks into these two cuts is $6.25 per pound. The filet mignon can be sold for $20.00 per pound, and the New York cut can be sold for $16.00 per pound.

Requirements:
1. Determine the incremental profit (or loss) per pound form processing the T-bone steaks into filet mignon and New York cut steaks. (PLEASE SHOW YOUR WORK HERE FOR FULL CREDIT)




2. Would you recommend to the company that they sell the T-bone steaks as is, or process them further into filet mignon and New York cut steaks? Please explain.

Explanation / Answer

1. Determine the incremental profit (or loss) per pound form processing the T-bone steaks into filet mignon and New York cut steaks.

Revenue from processing further 1 pound T-bones steaks:
   6-ounce filet mingon @$20 per pound (16 ounces per pound)
                ($20 x 6 / 16)                                $7.50
   8-ounce New York cut @$16 per pound
               ($16 x 8 / 16)                                 $8.00     $15.50
Less : Wholesale selling price of
           1 pound T-bones steak                                        $8.50
Incremental revenue due to further processing              $7.00
Less : Incremental costs
          Per pound cost of processing a 1 pound
          T-bone steak into 6 ounce filet mingon
          and 8 ounce New York cut                                    $6.25
Incremental benefit of further
processing T-bones steak                                             $0.75
                                                                                  =======
____________________________________________________________
2. Would you recommend to the company that they sell the T-bone steaks as is, or process them further into filet mignon and New York cut steaks? Please explain.

Yes. There is a $0.75 benefit per one-pound T-bone steak processed further.

The allocated joint product cost $5.80 is irrelevant. The cost will be incurred regardless of the fact whether the T-bone steaks are processed further or not.

To be relevant a cost or revenue must:
1) be a future cost or revenue, not a past cost or past revenue, and
2) the future cost or revenue must differ between alternatives

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