A telecommunications company have recently hired you as the cost accountant and wants to assess the profitability of its two internet and cable packages; Go Lite and Go Pro as currently the customers are opting for the Go Pro although it is more expensive. Management wants to understand the rationale behind this and has contacted you to make some assessments.

The entity currently prices all jobs using the cost-plus pricing method and currently uses a 20% margin. Overheads are currently absorbed on a machine hour basis but the entity wants to switch to activity-based costing (ABC). You are given the following data:

Overhead category	Annual overheads	Activity driver	Activities per year
Equipment set ups	$ 500,000	Number of set ups	20,000
Quality control	$ 300,000	Number of inspections	30,000
Machining costs	$ 200,000	Machine hours	2,500
Total	$1,000,000

Go Lite typically takes 50 set-ups, 30 inspections and 300 machine hours while Go Pro requires 30 set-ups, 10 inspection and 330 machine hours. The material cost and labour cost of the Go Lite is $230,000 and $255,000 respectively. For the Go Pro, material and labour cost amounts to $280,000 and $150,000 respectively.

Required:

(a) Calculate the total cost and selling price assigned to the Go Lite using the traditional approach. [4 marks]

(b) Calculate the total cost and selling price assigned to both units using the ABC principles assuming that the entity anticipates adding a 30% mark-up. [13 marks]

Explain three implementation problems often experienced when ABC is first introduced in an entity.