4 Problem 12-20 Sell or Process Further Decision [LO12-7) Prepared from a situat

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4 Problem 12-20 Sell or Process Further Decision [LO12-7) 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. 10 points Skipped 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: $ 2.10 Selling price ($2.10 per pound) Less joint costs incurred up to the split-off point where eBook 7-bone steak can be identified as a separate product Profit per pound $ 0.85 Print 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 References one 8-ounce New 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 $3.10 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 recomaiend that the T-bone steaks be sold as initially cut or processed further? Complete this question by entering your answers in the tabs below Required 1 Required 2 What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks? (Do not round Intermediate calculations. Round your answers to 2 decimal places.) per unit K Prev 4 of 7 Next>

Explanation / Answer

a 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 per pound ÷ 16 ounces per pound) 1.55 Total revenue from further processing 3.2 Less sales revenue from one T-bone steak 2.1 Incremental revenue from further processing 1.1 Less cost of further processing 0.19 Profit per pound from further processing 0.91 b The T-bone steaks should be processed further into the filet mignon and the New York cut. This will yield $0.91 per pound in added profit for the company. The $0.85 “profit” per pound shown in the text is not relevant to the decision because it contains allocated joint costs. The company will incur the joint costs regardless of whether the T-bone steaks are sold outright or processed further; thus, this cost should be ignored in the decision.

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