(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 profit: Selling price ($2.10 per pound) Less joint costs incurred up to the split-off point $2.10 where T-bone steak can be identified as a separate product 1.45 Profit per pound $0.65 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 $0.13 to further process one T-bone steak into the filet mignon and New York cuts. The filet mignon can be sold for $4.00 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
1 Per 16-Ounce T-Bone Sales from further processing: Sales price of one filet mignon 1.5 =4/16*6 Sales price of one New York cut 1.75 =3.5/16*8 Total revenue from further processing 3.25 Less sales revenue from one T-bone steak 2.1 Incremental revenue from further processing 1.15 Less cost of further processing 0.13 Profit per pound from further processing 1.02 Financial advantage = $1.02 per unit 2 The T-bone steaks should be processed further
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