Problem

Sell or Process Further

(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 ($2.20 per pound) $ 2.20
Less joint costs incurred up to the split-off point where
T-bone steak can be identified as a separate product 1.65

Profit per pound $ 0.55

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 $0.18 per pound. The filet mignon can be sold for $4.00 per pound, and the New York cut can be sold for $3.50 per pound.

Required:

1. Determine the profit per pound from processing the T-bone steaks into filet mignon and New York cut steaks.

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

T-bone steaks should be sold as initially cut.
T-bone steaks should be processed further.