PROBLEM 7 [12 MARKS] Pendleton Engineering makes cutting tools for metalworking operations. It makes two types of tool: R3, a regular cutting tool, and HP6, a high-precision cutting tool. R3 is manufactured on a regular machine but HP6 must be manufactured both the regular machine and a high-precision machine. The following information is available: R3 HP6 Selling price $100 $150 Variable manufacturing cost per unit $60 $100 Variable marketing cost per unit $15 $35 Budgeted total fixed overhead costs $350,000 $550,000 Hours required to produce one unit on the regular machine 1.0 0.5 Additional information includes: a. Pendleton Engineering faces a capacity constraint on the regular machine of 50 000 hours per year. b. The capacity of the high-precision machine is not a constraint. c. Of the $550,000 budgeted fixed overhead costs of HP6, $300,000 are lease payments for the high-precision machine. This cost is charged entirely to HP6 because Pendleton Engineering uses the machine exclusively to produce HP6. The lease agreement for the high-precision machine can be cancelled at any time without penalties. d. All other overhead costs are fixed and cannot be changed. Required: 1. What product mixthat is, how many units of R3 and HP6will maximise Pendleton Engineering's operating profit? Show your calculations. [6 marks] 2. Suppose that Pendleton Engineering can increase the annual capacity of its regular machines by 15,000 machine-hours at a cost of $150,000. Should Pendleton Engineering increase the capacity of the regular machines by 15,000 machine-hours? By how much will Pendleton Engineering's operating profit increase? Show your calculations. [6 marks]