Question 3 26 Marks Trout Manufacturing Inc (TMI) manufactures and sells a single consumer product, a home weather station. Operating at capacity, the company can produce and sell 216,000 weather stations per year. The company can produce only 18,000 units per month without incurring additional costs. The company had been operating at full capacity until 2020 when the economy was significantly impacted by the global pandemic. At full capacity, the cost associated with the production of weather stations are as follows: Direct materials $8,640,000 Direct labour 5,400,000 Variable overhead 2,160,000 Fixed overhead 1,296,000 Variable selling expense 2,073,600 Fixed selling and administrative expenses 3,600,000 Weather stations normally sell for $124. 00 each. Fixed manufacturing overhead is constant, on a monthly basis, within the production range of 150,000 - 216,000 weather stations per year. Fixed selling expenses are also constant, with the same amount of fixed cost incurred each month.Question 3 {continued} Required: 1. 2. At full capacity, what is the operating income for Trout Manufacturing? [4 marks] 2020 was a difcult year. Sales volume was fell to 115,000 units. The company was able to reduce xed manufacturing costs by 25% and xed selling expenses by 3096 by laying off manufacturing and sales managers. Variable costs remained steady throughout the year. Calculate operating income for 2020. {4 marks] 2021 has started out slowly for Trout. A high-end retail hardware store has approached Trout with an offer to purchase 6,000 units each month from July to September. The purchase price offered by the retail chain is $96.00 per unit. Trout would need to lease an engraving machine for the three months at a cost of $5,500 per month. Material costs would be higher by 4% due to the special engraving required. Trout believes sales to regular customers will rebound slightly and it expects to produce and sell 11,000 units inJuly, 13,000 unitsin August and 14,000 units in September. Variable selling costs will be reduced to $2.00 per unit on the special order. The company does not want to incur any overtime costs during this quarter. It the product performs well, the retail chain has indicated it will be willing to enter into a longerterm agreement at a higher price. If the company decides to undertake the special order, it will have to rehire the manufacturing managers that were laid off in the previous year and restore the xed manufacturing costs to the pre-pandemic level. Selling and administrative expenses will remain at the current level. a. What is the projected operating income from regular sales for the third quarter [July September]? [2 marks} b. Should Trout accept the offer from the retail chain? Assume production cannot exceed 18,000 units per-month but the production for the retail chain does not have to be equal in every month. {It marks] As an alternative to the special order from the retail chain, Trout is thinking of introducing a second product with current excess capacity. The new product measures wind speed and rainfall and would be useful to companies and individuals in the agriculture sector. The company would test the product in the July to September period. The following information about the product has been compiled by management: Unit selling price $180.00 Direct materials $62.00 Direct labour $30.00 Variable manufacturing overhead $13.00 Variable selling expense $21.50 Anticipated volume for the quarter [July-September]. 2?,000 Production would be the same in each month Question 3 (continued) If the company decides to undertake this project, it will have to re-hire the manufacturing and sales managers that were laid off in the previous year and restore the fixed costs to the pre- pandemic level. If the new production is not undertaken fixed costs will remain at current levels. Should Trout undertake this initiative from a quantitative perspective? (6 marks) 5. Assume that for 2022, sales volume for the weather station is expected to average 12,000 units per month and, if undertaken, the wind/rain product will remain at 9,000 units per month. Assuming no overtime, what mix of products would maximize operating income in 2022? (6 marks)