(Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat
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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 proft Selling price ($2.00 per pound) Less joint costs incurred up to the split-off point where $2.00 1.30 $ 0.70 T-bone steak can be identified as a separate product Profit per pound 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 $0.13 per pound. The filet mignon can be sold for $4.40 per pound, and the New York cut can be sold for $3.10 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.) er unce T-Bone Sales from further processing Sales price of one filet mignon Sales price of one New York cut Total revenue from further processing Less sales revenue from one T-bone steak Incremental revenue from further processing Less cost of further processing Profit(loss) per pound from further processing 2. Would you recommend that the T-bone steaks be sold as initially cut or processed further? O T-bone steaks should be sold as initially cut ( T-bone steaks should be processed furtherExplanation / Answer
ans)
1. Per 16-Ounce T-Bone
Sales from further processing:
Sales price of one filet mignon
(6 ounces × $4.40 per pound÷ 16 ounces per pound) 1.65
Sales price of one New York cut
(8 ounces × $3.10 perpound ÷ 16 ounces per pound) 1.55
Total revenue from further processing 3.2
Less sales revenue from one T-bone steak (2.0)
Incremental revenue from further processing 1.2
Less: cost of further processing (0.13)
Profit per pound from further processing 1.07
2) The T-bone steaks should be processed further into the filet mignon and the New York cut.This will yield $1.07 per pound in added profit for the company. The $0.7 “profit” perpound shown in the text is not relevant to the decision because it contains allocated jointcosts. The company will incur the joint costs regardless of whether the T-bone steaks are soldoutright or processed further; thus, this cost should be ignored in the decision.
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