(Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat

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: Selling price ($2.50 per pound) $ 2.50 Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product 1.65 Profit per pound $ 0.85 As mentioned above, instead of being sold as initially cut, 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 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 $0.18 per pound. The filet mignon can be sold for $4.00 per pound, and the New York cut can be sold for $3.30 per pound. Required: 1. Determine the profit per pound from processing the T-bone steaks into filet mignon and New York cut steaks. (Do not round intermediate calculations. Round your answers to 2 decimal places.) 2. Would you recommend that the T-bone steaks be sold as initially cut or processed further?

Explanation / Answer

Sales from further processing: Sales price of one filet mignon 1.5 =4/16*6 Sales price of one New York cut 1.65 =3.3/16*8 Total revenue from further processing 3.15 Less sales revenue from one T-bone steak 2.5 Incremental revenue from further processing 0.65 Less cost of further processing 0.18 Profit per pound from further processing 0.47 T-bone steaks should be processed further

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