Question

(Prepared from a situation suggested by Professor John W. Hardy.) Abilene Meat Processing Corporation 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 is or to process them further into filet mignon and New York cut steaks.

Management believes that a 1-pound T-bone steak would yield the following profit:

Wholesale selling price ($2.40 per pound)	$	2.40
Less joint costs incurred up to the split-off point where     T-bone steak can be identified as a separate product		1.55
Profit per pound	$	0.85

As mentioned above, instead of being sold as is, the T-bone steaks could be further processed into filet mignon and New York cut steaks. Cutting one side of a T-bone steak provides the filet mignon, and cutting the other side provides the New York cut. A one pound (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. The cost of processing the T-bone steaks into these cuts is $0.19 per pound. The filet mignon can be sold for $4.40 per pound, and the New York cut can be sold wholesale for $3.20 per pound.

Required:

1.	Determine the profit per pound from processing the T-bone steaks further into filet mignon and New York cut steaks. (Negative and loss amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Profit per pound from further processing

$

2.	Would you recommend that the T-bone steaks be sold as is or processed further?
	T-bone steaks should be processed further. T-bone steaks should be sold.

Nex

Answer 1

Part 1.

Revenue from further processing
Selling price of one filet mignon [1/16 * 6 * 4.40]	$1.65
Selling price of one New York cut [1/16 * 8 * 3.20]	$1.6
Total Revenue from further processing	$3.25
Less: revenue from t bone steak	(2.40)
Incremental revenue	0.85
Less: cost of processing	(0.19)
Profit per pound from processing the T-bone steaks further into filet mignon and New York cut steaks.	0.66

2.	Would you recommend that the T-bone steaks be sold as is or processed further?
	T-bone steaks should be processed further.