Fantastic Ltd is a manufacturer of Purses and Handbags. Management is concerned about the future level of profitability. Over the past few years profitability has been declining and overseas competition has been increasingly gaining market share in this price sensitive market. Several worrying factors were discussed at the recent management meeting regarding the draft budget for the year ending 30 June 2008. Some of the worrying factors include decline in the profits of the company and products appearing to be increasingly price sensitive to the extent that Fantastic Ltd is unsure of the selling price. The following cost data has been formulated for the budget period ending 30 June 2008: Description Purses ($) Handbags Total cost $ (Per unit) Per unit Selling price 300 600 Variable manufacturing costs 234 348 Commission 6 12 Total overhead costs 1 750 000 1 800 000 Direct fixed costs General fixed costs 3 550 000 2 536 000 Total fixed administrative and distribution costs 5 564 000 For the same budget period, the marketing manager estimated that the sales volume for Purses will be 100 000 units. The sales volume for handbags will be 50 000 units. Management has decided to implement activity-based costing system in order to manage costs better. Relevant data regarding general fixed overheads is as follows: Major activities Cost driver Fixed Rate per cost driver ($) Purchasing Number of purchase orders 75 Inspection Inspection hours 90 Dispatch Dispatch hours 95 Materials handling Number of moves 36 There was no opening inventory of Purses or Handbags at the beginning of the period. Also, there is no opening or closing work-in-progress or raw materials for both products. The fixed administration and distribution costs are allocated to Purses or Handbags based on units sold. Product demands on activities at the budgeted level of production are as follows: Major activities Purses Handbags Purchasing 2 000 orders 2 000 orders Inspection * 3 000 hours 2 400 hours Dispatch 4 000 hours Materials handling 15 000 moves 12 500 moves' 4 000 hours a) Calculate the margin of safety percentages for Fantastic Ltd if actual sales will take place in the same proportion as the expected sales volume. b) Prepare the budgeted income statement of Fantastic Ltd for the year ended 30 June 2008 for Purses only using an activity-based costing approach and presented using absorption costing. c) Discuss the aspects that management must consider determining the respective selling prices for the two products