(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) $ 7.95
less joint costs incurred up to the split-off point where
t-bone steak can be identified as a separate product 3.80
profit per pound $ 4.15
if 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.

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 that the t-bone steaks be sold as initially cut or processed further?