The Pig Case Suppose that there was a one person butcher sho

The Pig Case

Suppose that there was a one person butcher shop where each day, for $300, the butcher could buy an identical pig weighing 200 pounds. Each 200 pound pig can be cut into the following five products: Selling Price per pound Weight (a) Pork Chops $ 4.00 30 pounds (b) Ham 3.00 50 pounds (c) Bacon 1.60 100 pounds (d) Pig\'s Feet 1.00 15 pounds (e) Hide 10.00 5 pounds 200 pounds

Required: 1. Compute the financial accounting gross profit for the butcher shop for the first day, assuming everything is sold.

2. Allocate the cost of the pig to each of the five products based on their relative weights (e.g., 30/200 to pork chops). Compute the gross profit for each of the five products.

3. Repeat requirement #2 for day #2. If any of the products had a negative gross profit in the previous day, throw out that product immediately. Sell only the remaining products. Allocate the pig\'s cost to the remaining products based on the relative weights of those products.

4. Repeat requirement #3 for days 3 through 6.

5. Explain what is going on.

Solution

1 & 2.

3.

4.

Day5

5.

As the sale of unprofitable products is being eliminated, the cost of the pig is being reallocated to the remaining parts, resulting in increasing the cost of the parts (sine we are allocating the cost based on the weight of the products, the cost absorbed by the loss making product gets redistributed among the profitable products).

This results in making the one of the remaining products loss making , and as we proceed in this procedure, on the sixth day the butcher will not have any thing to sell.

The better way is to sell all the parts which we get, so that we can at least realise some cost from the loss making products, so that the business gives the optimum returns. This can be seen from the way the total profit has resulted,(On the first day the total profit is $195 which will be a loss of $250 by the fifth day).

We can see that , on the first day although \"FEET\" is giving a loss of $7.50 , the product is absorbing the cost of $15 (Revenue from Feet). Otherwise the total cost of $22.50 will be borne by the other products, which has resluted in a reduced profits of $180 on Day 2 and resulting in Bacon becoming the next unprofitable product.

Therefore , once the cost of the pig is incurred, it is better to sell all the products derived from it so as to maximise the profit.