Valley Meat Processing Corporation is a major processor of beef and other meat products. The company has a large number of T-bone steaks 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 kilogram of T-bone steak would yield the following profit:
| Wholesale selling price ($16.00 per kilogram) | $ | 16.00 | |
| Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product | 12.00 | ||
| Profit per kilogram | $ | 4.00 | |
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. One 480-gram T-bone steak cut in this way will yield one 181-gram filet mignon and one 241-gram New York cut; the remaining grams are waste. The cost of processing the T-bone steaks into these cuts is $1.40 per kilogram. The filet mignon can be sold retail for $26 per kilogram, and the New York cut can be sold wholesale for $22 per kilogram.
Required:
1. Determine the profit for each 480-gram T-bone steak processed further into filet mignon and New York–cut steaks. (Round your answers to 2 decimal places.)
2. Would you recommend that the T-bone steaks be sold as is or processed further?
multiple choice 2
- Sold outright
- Processed further
Solution
1.
Selling price of one filet mignon (.181 kg × $26.00 per kilogram) = $4.71
Selling price of one New York cut (.241 kg × $22.00 per kilogram) = 5.30
Less revenue from one T-bone steak ($16.00 × .480 kg) = 7.68
Less cost of further processing ($1.40 × .480 kg) = 0.67
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