(Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat
ID: 2515662 • 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: 2.40 Selling price ($2.40 per pound) Less joint costs incurred up to the split-off point where 1.45 T-bone steak can be identified as a separate product 0.95 Profit per pound As mentioned above, instead of being sold as initially cut, the T-bone steaks could be further processed into filet mignon and New York cut steaks. 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. The cost of processing the T-bone steaks into these cuts is $0.15 per pound. The filet mignon can be sold for $4.40 per pound, and the New York cut can be sold for $3.30 per pound.Explanation / Answer
Q1.
Sales from further processing
- Sale price of one fliet mignon 4.40
- Sale price of New York cut 3.30
Total revenmue from further processing 7.70
less: Sale revenue from one T-Bone steak -2.40
Incremental revenue from further processing 5.30
less: cost of futher processing -015
Profit per pound from further processing 5.15
Q2.
Option B - T-bone steak should be processed further beacuse profit per p;und from further processing is $5.15, whereas profit per pund without processing is only $0.95($2.40-$1.45)
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