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 $1.50 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 $1,875.000 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 $1.50. 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 $2.50 per Hour

QUESTION 3. [20 marks] 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 $1.50 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 $1,875.000 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 $1.50. 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 $600 per Spec 2,000 $40 per Hour Material Handling Hours $8 per Hour Purchase Orders $250 per Order Required: a) Explain how the $1,475,000 of cost savings was calculated using conventional make-or-buy analysis. [4 marks] b) Determine the costs that will be saved by purchasing the canisters using the activity drivers. [6 marks] c) Finalise the make-or-buy decision using the activity data. Should Darylyn buy the canisters? [4 marks] d) If the conventional and activity-based analyses produced different conclusions, explain why. [6 marks]