McCormick Beef Processing is a small Beef processing and Butcher shop facility located in a small Nebraska town. In addition to Beef processing, the Company has a traditional Retail Butcher Shop. McCormick processes 50 head of cattle each month. Cattle weigh in at 1,300 pounds per animal. Cattle are acquired for $125 per hundred-weight ($1.25 per pound). Each 1,300 pound animal results in 1,100 pounds of output as indicated in the following table.

Total Cost of 50 Cattle $81,250.

	Lbs. Per Animal	Lbs. Per Month = 50 Animals	Sales Price Per Pound	Total Sales Value
Steak	100	5,000	$11.56	$57,800
Roast	300	15,000	$4.53335	$68,000
Hamburger	400	20,000	$1.785	$35,700
Hides	200	10,000	$0.68	$6,800
Hooves	100	5,000	$0.34	$1,700
Total	1,100	55,000		$170,000

Separation Costs
To Separate Beef into the various products McCormick has the following Costs.

	Monthly Cost
Direct Labor	$70,750
Allocated Rent and Utilities	$12,000
Depreciation on Separation Equipment	$16,000
Total Separation Costs	$98,750

Depreciation (total $16,000): There is no market value for the equipment currently being depreciated at $16,000 per month. Furthermore, there is no viable alternative use for the equipment. This equipment will last for five to ten more years.

Rent and Utilities (Total $10,000 rent and $10,000 utilities): Rent for the entire store is $10,000. $5,000 has been allocated to the separation process. Should the Company discontinue the Separation Process the total rent will not change. The Company incurs $10,000 of utilities each month. If the separation process is discontinued, the Company will save $7,000 each month on utilities. The Company will continue to incur $3,000 of utilities.

Summary

Income and Expense from Beef Processing
Revenue from All Products	$170,000
Cost of Beef	($81,250)
Separation Costs	($98,750)
Loss from Beef Processing	($10,000)

Further Processing - The Company has two opportunities for further processing.

Cattle Hooves: The Company can grind the Cattle hooves into a fine powder; then add nitrates and sell the mixture as fertilizer. Adding the nitrates will increase the volume of the hooves from 5,000 lbs. to 6,000 lbs. The final sales price will be $1.00 per pound. The Cost of the nitrates and the additional processing will be $4,500.

Hides: A tanner in the same town has offered to tan the hides which will turn the hides into soft leather which can then be sold to shoe-makers. Tanning the hides will cause the weight of the hides to decrease from 10,000 lbs. to 8,000 lbs. The 8,000 lbs. can be sold for $2.00 per pound. Tanning the hides into soft leather will cost $4,200 additional processing cost.

Required: Answers must be supported with computations, reports and explanations. (You may find it easier to organize your response in a Word or Excel file which you can then attach to your post)

1. What costs in the narrative above are not relevant and therefore should not be part of the decision making process?
2. Should the Company stop the Beef processing part of the Business entirely since the Beef cost plus the separation costs exceed the market value of all of the products?
3. Should the Company focus only on Steaks, Roasts, and Hamburger and disregard the other products?
4. Should the Company proceed with additional processing on Hooves?
5. Should the Company proceed with additional processing on Hides?

Answer rating: 100% (QA)

Acost irrelevat for decision making Depreciation allocated rent and utilities 160005000300024000 B I... View the full answer