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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 fillet 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 ($2.25 per pound) . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.25
Less joint costs incurred up to the split-off point where
T-bone steak can be identified as a separate product . . . . . . . . 1.80
Profit per pound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.45
As mentioned above, instead of being sold as initially cut, the T-bone steaks could be further
processed into fillet Mignon and New York cut steaks. Cutting one side of a T-bone steak provides
the fillet 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 fillet 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 $0.25 per
pound. The fillet Mignon can be sold for $4.00 per pound, and the New York cut can be sold for
$2.80 per pound.
Required:
1. Determine the profit per pound from processing the T-bone steaks into fillet Mignon and New
York cut steaks.
2. Would you recommend that the T-bone steaks be sold as initially cut or processed further?
Why?
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Solution Summary
The solution explains how to decide if a product should be sold at split off or processed further
Solution Preview
a. We need to calculate the incremental revenue and the incremental cost.
Revenue from further processing is
(i) Revenue from filet mignon
Sale price per ounce = 4.00/16 = 0.25 per ...
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