(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 ($7.95 per pound) $ 7.95Less joint costs incurred up to the split-off point whereT-bone steak can be identified as a separate product 3.80Profit per pound $ 4.15If the company were to further process the T-bone steaks, then 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. It costs $0.55 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 $8.80 per pound.What is the financial advantage (disadvantage) of further processing one T-bone steak into filet mignon and New York cut steaks?

Compute the financial advantage (disadvantage) of further processing of T-bone into filet mignon and New York cut steaks using the equation as shown below:

Financial advantage = Total sales from further processing −

Sale revenue lost of one T−bone − Cost of further processing

=$8.90−$7.95−$0.55

=$0.40

Hence, the financial advantage (disadvantage) of further processing of T-bone into filet mignon and New York cut steaks is $0.40.

Working Notes:

Compute the total sales from further processing using the equation as shown below:

Sales from further processing = One Fileted Mignon + New York Cut

=$4.50+$4.40

=$8.90

Hence, the total sale from further processing is $8.90.

Compute the Sales revenue from one fileted mignon after further processing using the equation as shown below:

One Fileted Migon = (Selling price per filet mignon×Yeild per ounce / Size of one T−bone steak )

= $12×6 ounce / 16 ounce

=$4.50

Hence, the sales revenue from one fileted mignon after further processing is $4.50.

Compute the Sales revenue from one New York cut after further processing using the equation as shown below:

New York cut = (Selling price per New York cut × Yeild per ounce / Size of one T−bone steak )

= $8.8×8ounce / 16 ounce

=$4.40