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(Prepared from a situation suggested by Professor John W. Hardy.) Lone Star Meat Packers is...

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Accounting

(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 is deciding whether to sell the T-bone steaks as they are initially cut or process them further into filet mignon and the New York cut.

If the T-bone steaks are sold as initially cut, the company figures a 1-pound T-bone steak yields the following profit:

Selling price ($8.15 per pound) $ 8.15
Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product 1.70
Profit per pound $ 6.45

If the company further processes the T-bone steaks, then one 16-ounce T-bone steak will yield one 6-ounce filet mignon, one 8-ounce New York cut, and two ounces of waste. It costs $0.12 to further process one T-bone steak into the filet mignon and New York cuts. The filet mignon can be sold for $12.00 per pound, and the New York cut can be sold for $9.00 per pound.

Required:

  1. What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks?
  2. Would you recommend the T-bone steaks be sold as initially cut or processed further?
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