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 ($2.40 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 2.40 1.25 1.15 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 $0.19 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 $3.60 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? Complete this question by entering your answers in the tabs below. Required 1 Required 2 What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) per unit Required 2 Required 1

Answer 1

Financial advantage (disadvantage)
Particulars				amount
sale from further processing
sale price of one filet mignon (3.60/16*6)				1.35
sale price of one new york cut (3.60/16*8)				1.8
Total revenue				3.15
less: revenue from one T bone steak				2.4
incremental revenue from further processing				0.75
less: further processing cost				0.19
profit from further processing (per pound)				0.56
2) T bone steaks should be further processed

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