Darylyn Chocolate company produces Rockyroady chocolate squares which are sold in brightly

decorated canisters. Cool Canisters$$ sales manager has approached Darylyn with an offer to supply

canisters at $$1\mathrm{.}50$ each. Currently, Darylyn assigns the following costs to production of canisters:

Direct Material $$610,000$

Direct Labour $11,000$ Hours @ $ per Hour $$495,000$

Variable Overhead $$20$ per Direct Labour Hour $$220,000$

Fixed Overhead $$50$ per Direct Labour Hour $$550,000$

Total Cost $$1,875\mathrm{.}000$

Number of Canisters $750,000$

A conventional make$-$or$-$buy analysis suggests that Cool Canister$$s offer should be accepted, as the

cost per canister would be more than $$1\mathrm{.}50.$ If Darylyn decides to buy the canisters, then $$1,475,000$ of

total costs would be avoided, as $$400,000$ Fixed Overhead relates to Building Depreciation.

The management accountant has requested that further detailed analysis should be conducted before a

decision is made. The management accountant has also provided activity drivers that relate to both

Variable and Fixed Overheads in the production of canisters as follows:

Product Specs $10$ $$600$ per Spec

Supervisory Hours $2,000$ $$40$ per Hour

Material Handling Hours $6,000$ $$8$ per Hour

Purchase Orders $55$ $$250$ per Order

Inspections $30$ $$300$ per Inspection

Setups $15$ $$400$ per Setup

Machine Hours $70,000$ $$2\mathrm{.}50$ per Hour

Required:

a$)$ Explain how the $$1,475,000$ of cost savings was calculated using conventional make$-$or$-$buy

analysis.

b$)$ Determine the costs that will be saved by purchasing the canisters using the activity drivers.

c$)$ Finalise the make$-$or$-$buy decision using the activity data. Should Darylyn buy the canisters?

d$)$ If the conventional and activity$-$based analyses produced different conclusions, explain why.