(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:

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 $0.15 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 $3.70 per pound.

Required:

1. What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks?

2. Would you recommend that the T-bone steaks be sold as initially cut or processed further?

Selling price ($2.00 per pound) $ 2.00 Less joint costs incurred up to the split-off point where
T-bone steak can be identified as a separate product 1.45 Profit per pound $ 0.55

Explanation / Answer

Profit if only T-bone steaks are sold
Wholesale selling price ($2.00 per pound)                                     $ 2.00
Less: joint costs incurred up to the split-off point where
T-bone steak can be identified as a separate product                      1.45
Profit per pound                                                                              $ 0.55

Profit if further processed.
3.70 x 8/16 = $1.85 selling price of New York cut
4.40 x 6/16 = $1.65 selling price of filet mignon
Less joint costs incurred up to the split-off point where
T-bone steak can be identified as a separate product 1.45
Added costs = -$0.15

Profit per pound = $1.90

Profit is increased by $1.35

Recommended to process further as profit is increased.

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