(Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat
ID: 2513437 • Letter: #
Question
(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: $2.00 1.55 0.45 Selling price ($2.00 per pound) Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product Profit per pound If the company were to further process the T-bone steaks, then 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. It costs $0.13 to further process one T-bone steak into the filet mignon and New York cuts. The filet mignon can be sold for $4.40 per pound, and the New York cut can be sold for $3.30 per pound.Explanation / Answer
1
Calculation of benefit/(Loss) for further processing
Sales:
Filet mignon (4.40/16)*6
$1.65
New yark cut (3.3/16)*8
$1.65
Total revenue
$3.30
Less: cost of further processing
$0.13
Less: Joint costs
$1.55
Net Profit (A)
$1.62
Less: Profit per pound without further processing (B)
$0.45
Net financial advantage for further processing (C=A-B)
$1.17
2
Recommendation
Ans
T-bone steaks Should be processed further
1
Calculation of benefit/(Loss) for further processing
Sales:
Filet mignon (4.40/16)*6
$1.65
New yark cut (3.3/16)*8
$1.65
Total revenue
$3.30
Less: cost of further processing
$0.13
Less: Joint costs
$1.55
Net Profit (A)
$1.62
Less: Profit per pound without further processing (B)
$0.45
Net financial advantage for further processing (C=A-B)
$1.17
2
Recommendation
Ans
T-bone steaks Should be processed further
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