PROBLEM 12–22 Sell or Process Further [LO2]

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	Â
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 pro- cessed 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.

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

(Prepared from a situation suggested by Professor John W. Hardy.)