In addition to fine chocolate, International Chocolate Company also produces chocolate-covered pretzels in its Savannah plant. This product is sold in five-pound metal canisters, which also are manufactured at the Savannah facility. The plant manager, Marsha Mello, was recently approached by Catawba Canister Company with an offer to supply the canisters at a price of $1.00 each. International Chocolate’s traditional product-costing system assigns the following costs to canister production.

Direct material .................................................................................................................................................... $ 300,000 Direct labor (12,000 hrs. at $15 per hr.) ............................................................................................................ 180,000 Variable overhead ($10 per direct-labor hr.) ..................................................................................................... 120,000 Fixed overhead ($45 per direct-labor hr.) ......................................................................................................... 540,000 Total cost ............................................................................................................................................................ $1,140,000 Unit costs: $1,140,000 ÷ 760,000 canisters = $1.50 per canister Mello’s conventional make-or-buy analysis indicated that Catawba’s offer should be rejected, since only $708,000 of costs would be avoided (including $80,000 of supervisory salaries and $28,000 of machinery depreciation). In contrast, the firm would spend $760,000 buying the canisters. The controller, Dave Mint, came to the rescue with an activity-based costing analysis of the decision. Mint concluded that the cost driver levels associated with canister production are as follows:

Additional conventional and ABC data from the Savannah plant are given in Exhibits 14–19 and 14–20.
Required:
1. Show how Mello arrived at the $708,000 of cost savings in her conventional make-or-buy analysis.
2. Determine the costs that will be saved by purchasing canisters, using Mint’s ABC data.
3. Complete the ABC relevant-costing analysis of the make-or-buy decision. Should the firm buy from Catawba?
4. If the conventional and ABC analyses yield different conclusions, briefly explain why.

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10 product specs 2,000 supervisory hours 6,000 material-handling hours 55 purchase orders 30 inspections 15 setups 70,000 machine hours