Question

Problem 11-20 Sell or Process Further Decision [LO11-7J (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 $2.00 Selling price ($2.00 per pound) Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product 1.50 $0.50 Profit per pound 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 $0.15 to further process one T-bone steak into the filet mignon and New York cuts. The filet mignon can be sold for $4.00 per pound, and the New York cut can be sold for $3.30 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 answer to 2 decimal places.) per unit Required 1 Required 2

Answer 1

Requirement 1

Financial advantage

$    5.15

per unit

Calculations:

Statement of Comparative Cost
Sale initially	Amount	Process further	Amount
Sale Price	$    2.00	Sale Price of filet mignon	$    4.00
Joint Cost	$ (1.50)	Sale Price of New York cut	$    3.30
		Joint Cost	$ (1.50)
		Further processing cost	$ (0.15)
Net Profit	$    0.50	Net Profit	$    5.65

Requirement 2

T-bone steaks should be processed further.

In case of any doubt, please comment.