Reference no: EM132479462

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 ($2.50 per pound)                                     $2.50

Less joint costs incurred up to the split-off point where

T-bone steak can be identified as a separate product        1.40

Profit per pound                                                         $1.10

Point 1: 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 $0.17 to further process one T-bone steak into the filet mignon and New York cuts. The filet mignon can be sold for $3.60 per pound, and the New York cut can be sold for $3.00 per pound.

Question 1. What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks?

Question 2. Would you recommend that the T-bone steaks be sold as initially cut or processed further?