(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: $ 2.10 Selling price ($2.10 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 1.60 $ 0.50 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 $3.90 per pound.Explanation / Answer
Answer 1 Determination of the profit per pound from processing the T-bone steaks into filet mignon and New York Cut Steaks Per 16 Ounce T-Bone Sales from further processing - Sale price of one filet mignon [($4.40 / 16 ounce) * 6 ounce] $1.65 - Sale price of one New York Cut [($3.90 / 16 ounce) * 8 ounce] $1.95 Total Revenue from further processing $3.60 Less : Sales revenue from one T-bone steak $2.10 Incremental Revenue from further processing $1.50 Less: Cost of further processing $0.15 Profit (Loss) per pound from further processing $1.35 Note : 1 Pound = 16 Ounce Answer 2 I would recommend that the T-bone steaks should be sold as processed further as there is a incremental profit of $1.35 per pound of if processed further.
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