Question

3.

Haggstrom, Inc., manufactures steel fittings. Each fitting requires both steel and an alloy that allows the fitting to be used under extreme conditions. The following data apply to the production of the fittings.

     

Direct materials per unit
3 pounds of steel at $0.60 per pound
0.5 pounds of alloy at $1.70 per pound
Direct labor per unit
0.02 hours at $26 per hour
Overhead per unit
Indirect materials	$	0.60
Indirect labor		0.70
Utilities		0.50
Plant and equipment depreciation		0.95
Miscellaneous		0.65
Total overhead per unit	$	3.40

The plant and equipment depreciation and miscellaneous costs are fixed and are based on production of 250,000 units annually. All other costs are variable. Plant capacity is 300,000 units annually. All other overhead costs are variable.

The following are forecast for year 2. Contract negotiations with the union are expected to lead to an increase in hourly direct labor costs of 4 percent, mostly in the form of additional benefits. Commodity prices, including steel, are expected to decline by 10 percent due to the economic slowdown. Alloy prices are expected to remain constant. Plant and equipment depreciation costs are expected to increase by 6 percent. All other unit overhead costs are expected to remain constant.

Haggstrom expects to sell 230,000 units in year 2. The current inventory of fittings is 20,000 units, and management would like to see a reduction of inventory of 10,000 units by the end of the year 2. Steel and alloy inventories will not change. Sales are approximately uniform over the year.

Required:

a. Prepare a production budget

b. estimate the materials, labor, and overhead costs for year 2.

Answer 1

Answer is given below