Sell or Process Further [LO7]

(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 ($2.25 per pound) . . . . . . . . . . . . . . . . . . . $2.25 Less joint costs incurred up to the split-off point where T-bone steak can be identifi ed as a separate product . . . . . . . . . 1.70 Profi t per pound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.55 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 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 $0.20 per pound. The filet mignon can be sold for $3.60 per pound, and the New York cut can be sold wholesale for $2.90 per pound.
Required:
1. Determine the profit per pound from processing the T-bone steaks 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?