Question

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. 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 ($2.20 per pound) $ 2.20 Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product 1.35 Profit per pound $ 0.85 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 $0.20 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 $3.50 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?

Answer 1

There is no short answer.

Step-by-step explanation:

The T-bone steak is sold at $2.20 per pound with a $0.85 profit for each which means the cost of the T-bone is $1.35 per pound.

If the company decides to cut the T-bone steaks into filet mignons and New York cuts, they get a 6 ounce filet mignon which is 0.375 pound, and an 8 ounce New York cut which is 0.5 pound.

The filet mignon is sold for $4.40 per pound which means that for a 6 ounce piece the company will get $1.65. The New York cut is sold for $3.50 per pound which means that for an 8 ounce piece, the company will get $1.75.

The cost of the T-bone ($1.35) and the processing cost $0.20, the total cost of the final pieces of filet mignon and New York cuts to the company are in total $1.55. The company gets $3.40 by selling the two pieces seperately. This brings their profit to $1.85 which is $0.50 higher than the profit they get from selling the T-bone.

I hope this answer helps.