(Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat
ID: 2513993 • Letter: #
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 $0.18 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 $3.60 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 ($2.20 per pound) $ 2.20 Less joint costs incurred up to the split-off point whereT-bone steak can be identified as a separate product 1.65 Profit per pound $ 0.55
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 1.8 =3.6/16*8 Total revenue from further processing 3.3 Less sales revenue from one T-bone steak 2.2 Incremental revenue from further processing 1.1 Less cost of further processing 0.18 Profit per pound from further processing 0.92 Financial advantage = $0.92 per unit 2 The T-bone steaks should be processed further
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.