# Question

Pendleton Engineering makes cutting tools for metal-working operations. It makes two types of tools: R3, a regular cutting tool, and HP6, a high-precision cutting tool. R3 is manufactured on a regular machine but HP6 must be worked on both the regular machine and a high-precision machine. The following information is available:

The following additional information is available:

a. Pendleton faces a capacity constraint on the regular machine of 50,000 hours per year.

b. Pendleton has no capacity constraint on the high-precision machine.

c. Of the $550,000 budgeted fixed overhead costs of HP6, $300,000 is for lease payments for the high-precision machine. This cost is charged entirely to HP6 because Pendleton uses the machine exclusively to produce HP6. The leasing agreement for the high-precision machine can be cancelled at any time without penalties.

d. All other fixed overhead costs cannot be changed.

REQUIRED

1. What product mix—that is, how many units of R3 and HP6—will maximize Pendleton’s operating income? Show your calculations.

2. Suppose Pendleton can increase the annual capacity of the regular machine by 15,000hours at a cost of $180,000. Should Pendleton increase the capacity of the regular machine by 15,000 machine-hours? By how much will Pendleton’s operating income increase? Show your calculations.

3. Suppose that the capacity of the regular machine has been increased to 65,000 hours. Pendleton has been approached by Carter Corporation to supply 20,000 units of another cut-ting tool, S3, for $120 per unit. S3 is exactly like R3 except that its variable marketing costs are$15 per unit. What product mix should Pendleton choose to maximize operating income?

The following additional information is available:

a. Pendleton faces a capacity constraint on the regular machine of 50,000 hours per year.

b. Pendleton has no capacity constraint on the high-precision machine.

c. Of the $550,000 budgeted fixed overhead costs of HP6, $300,000 is for lease payments for the high-precision machine. This cost is charged entirely to HP6 because Pendleton uses the machine exclusively to produce HP6. The leasing agreement for the high-precision machine can be cancelled at any time without penalties.

d. All other fixed overhead costs cannot be changed.

REQUIRED

1. What product mix—that is, how many units of R3 and HP6—will maximize Pendleton’s operating income? Show your calculations.

2. Suppose Pendleton can increase the annual capacity of the regular machine by 15,000hours at a cost of $180,000. Should Pendleton increase the capacity of the regular machine by 15,000 machine-hours? By how much will Pendleton’s operating income increase? Show your calculations.

3. Suppose that the capacity of the regular machine has been increased to 65,000 hours. Pendleton has been approached by Carter Corporation to supply 20,000 units of another cut-ting tool, S3, for $120 per unit. S3 is exactly like R3 except that its variable marketing costs are$15 per unit. What product mix should Pendleton choose to maximize operating income?

## Answer to relevant Questions

Oxford Engineering manufactures small engines. The engines are sold to manufacturers who install them in such products as lawn mowers. The company currently manufactures all the parts used in these engines but is considering ...Examples of prices charged by Phones-R-Us for long-distance telephone calls within Canada at different times of the day and week are as follows: Peak period (8 a.m. to 6 p.m., Monday through Friday) ...Snappy Tiles is a small distributor of marble tiles. Snappy identifies its three major activities and cost pools as ordering, receiving and storage, and shipping, and it reports the following details for 2012: For 2012, ...Cutler Electronics makes a Blu-ray player, CE100, which has 80 components. j Manufacturing cost per Cutler sells 7,000 units each month for $70 each. The costs of manufacturing CE100 are $45 per unit, or $315,000 per month. ...How does Collusive pricing differ from Predatory pricing?Post your question

0