5.

(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:

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		1.35
Profit per pound	$	1.05

As mentioned above, instead of being sold as initially cut, 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 $0.15 per pound. The filet mignon can be sold for $4.00 per pound, and the New York cut can be sold for $3.60 per pound.

Required:

1.

Determine the profit per pound from processing the T-bone steaks into filet mignon and New York cut steaks. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

4.Bed & Bath, a retailing company, has two departments, Hardware and Linens. The companys most recent monthly contribution format income statement follows:

				Department
	Total			Hardware			Linens
Sales	$	4,240,000		$	3,160,000		$	1,080,000
Variable expenses		1,361,000			958,000			403,000
Contribution margin		2,879,000			2,202,000			677,000
Fixed expenses		2,170,000			1,360,000			810,000
Net operating income (loss)	$	709,000		$	842,000		$	(133,000	)

A study indicates that $374,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 14% decrease in the sales of the Hardware Department.

Required:

If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?