(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:

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 $0.25 per pound. The filet mignon can be sold for $4.00 per pound, and the New York cut can be sold for $2.80 per pound.

Required:

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

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

Selling price ($2.25 per pound) Less joint costs incurred up to the split-off point where T-bone steak can be identified as a separate product $2.25 1.80 Profit per pound $0.45