Abkaberplc assembles three types of motorcycle at the same factory: the 50cc Sunshine; the 250cc Roadster and the 1000cc Fireball. It sells the motorcycles throughout the world. In response to market pressures Abkaber plc has invested heavily in new manufacturing technology in recent years and, as a result, has significantly reduced the size of its workforce. Historically, the company has allocated all overhead costs using total direct labour hours, but is now considering introducing Activity Based Costing (ABC). Abkaber plc's accountant has produced the following analysis. Annual output (units) Sunshine Roadster 2,000 1,600 Fireball 400 Annual direct labour hours Selling price ($ per unit) Raw material cost ($perunit) 200,000 4,000 400 220,000 6,000 600 80,000 8,000 900 The three cost drivers that generate overheads are: Deliveries to retailers - the number of deliveries of motorcycles to retail showrooms. Set-ups the number of times the assembly line process is re-set to accommodate a production run of a different type of motorcycle. Purchase orders - the number of purchase orders. Theannual costdrivervolumes relating to each activity and foreach type of motorcycle are as follows: Number of purchase Number of deliveries to retailers Sunshine 100 Roadster 80 Fireball 70 Number of set-ups orders 35 40 25 400 300 100 The annual overhead costs relating to these activities are as follows: Deliveries to retailers Set-up costs Purchase orders $ 2,400,000 6,000,000 3,600,000 All direct labour is paid at $5 per hour. The company holds no inventories. At a board meeting there was some concern over the introduction of activity based costing. The finance director argued: 'I very much doubt whether selling the Fireball is viable but I am not convinced that activity based costing would tell us any more than the use of labour hours in assessing the viability of each product.' The marketing director argued: 'I am in the process of negotiating a major new contract with a motorcycle rental company forthe Sunshine model. Forsuch a big orderthey will notpay our normal prices but we need to at least cover our incremental costs. I am not convinced that activity based costing would achieve this as it merely averages costs for our entire production'. The managing director argued: 'I believe that activity based costing would be an improvementbutit still has its problems. For instance if we carry out an activity many times surely we get better at it and costs fall rather than remain constant. Similarly, some costs are fixed and do not vary either with labour hours or any other cost driver. The chairman argued: 'I cannot see the problem. The overall profit for the company is the same no matter which method of allocating overheads we use. It seems to make no difference to me.' Required: a) Calculate the total profit on each of Abkaber plc's three types of product using each of the following methods to attribute overheads: i. the existing method based upon labour hours ii. activity based costing. b) Explain the implications of activity based costing for Abkaber plc, and is so doing evaluate the issues raised by each of the directors.