QUESTION Gardenscapes, Ltd manufactures and sells packs of decking in two different qualities sold under the names of 'Basic' and 'Elite'. The Basic product is sold at a mark up of 25% on cost while the Elite is sold at a mark un of 30%. The production costs are shown in the table below: Direct materials Direct labour Basic 20 7 Elite 30 14 The budget for the coming year plans for the production and sale of 40,000 units of basic and 10,000 units of Elite. Products are made to order and materials are supplied on a just in time basis. Some of the retailers that buy the Elite product have said they intend to stop buying the product because it is too expensive. The management accountant of the company has decided to explore the possibility of introducing Activity-Based Costing as a replacement for the current system of full absorption costing. She has collected the following information and asked you to prepare some estimates. Machine set ups Inspections Sales orders processed Machining 000 120 172 186 400 Machines are set up differently for the two types of product to allow for more accurate dimensions and superior appearance of the Elite. Machines will require resetting 25,000 times for the Basic and 2,500 times for the Elite in order to produce the quantities planned in the budget. A random sample of both products is inspected before being sent to customers. 20,000 inspections are planned for the Basic and 2,500 for the Elite in order to fulfil the needs of the budget. The Basic is sold mainly to individual end consumers but the Elite is also sold to several large retailers therefore 1,250 Elite sales orders are expected for the budgeted sales quantities along with 30,000 sales orders for the Basic. Under the current absorption costing system, all overheads are absorbed based on machine time. Each unit of Basic requires 30 minutes of machine time. Each unit of Elite requires 1 hour of machine time.