. Sell or Process Further Valley Meat Processing Corporation is a major processo
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Question
. Sell or Process Further
Valley Meat Processing Corporation is a major processor of beef and other meat products. The company has a large number of T-bone steaks 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 kilogram of T-bone steak would yield the following profit:
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 480-gram T-bone steak cut in this way will yield one 181-gram filet mignon and one 241-gram New York cut; the remaining grams are waste. The cost of processing the T-bone steaks into these cuts is $1.40 per kilogram. The filet mignon can be sold retail for $26 per kilogram, and the New York–cut can be sold wholesale for $22 per kilogram.
Required:
1. Determine the profit for each 480-gram T-bone steak processed further into filet mignon and New York–cut steaks.
2. Would you recommend that the T-bone steaks be sold as is or processed further? Why?
(Prepared from a situation suggested by Professor John W. Hardy.)
kilogram). Less joint costs incurred up to the split-off point where Tbone steak can be identified as a separate product ...........................-00 Profit per kibgraExplanation / Answer
The t-bone steaks should be processed further into the filet mignon and the New York cut. This will yield $3.46 ($1.66/.480kg) per kilogram in added profit for the company. The $4.00 "profit" per kilogram for T-bone steak mentioned in the problem statement is not relevant to the decision, because it contains allocated joint costs. The company will incur the allocated joint costs regardless of whether the T-bone steaks are sold outright or processed further; thus, this cost should be ignored
Sales Revenue filet mignon =181/1000*26 4.71 New York–cut =241/1000*22 5.30 Sales Revenue 10.01 Less revenue from one T-bone steak ($16.00 × .480 kg). 7.68 Incremental revenue from further processing. 2.33 Less cost of further processing ($1.40 × .480 kg). 0.67 Profit from further processing. 1.66Related Questions
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