I need help with all parts. Please and Thank You. (Prepared from a situation sug

ID: 2587794 • Letter: I

Question

I need help with all parts. Please and Thank You.

(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 $ 2.40 1.60 $ 0.80 Selling price ($2.40 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 Neww York cut the remaining ounces are waste. It costs $0.19 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 $3.50 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?

Explanation / Answer

Per 1 pound or 16 ounce T-Bone

Sales from Further Processing

*Sales price of filet mignon

$1.65

**Sales price of New York cut

$1.75

Total revenue from further processing

$3.40

Less: Sales revenue from T- bone steak

$2.40

Incremental revenue from further processing

$1.00

Less: Cost of further processing

$0.19

Profit per pound from further processing

$0.81

*Sales price of one filet mignon = 6 ounce/16 ounce x $ 4.4 per pound

= 0.375 pound x $ 4.4 per pound = $ 1.65

**Sales price of one New York cut = 8 ounce/16 ounce x $ 3.50 per pound

= 0.5 pound x $ 3.50 per pound = $ 1.75

On further processing t-bones gives extra benefit of $ 0.81

2. The T-bone steaks should be processed further into the filet mignon and the New York cut, which will provide $0.81 per pound more profit for the company. The sales revenue from t-bones is already considered. This extra revenue of $ 0.81 is besides the profit from t-bones which is deducted in the calculation as $ 2.40 that includes split-off cost and profit from selling as T-bones.