In addition to fine chocolate, International Chocolate Company also produces chocolate covered pretzels in its South Yarra plant. This product is sold in 5 kilogram metal canisters which are also manufactured at the South Yarra facility. The plant manager, Alice Bell, was recently approached by Cataba Canister Company with an offer to supply the canisters at a price of $1 each. International Chocolates traditional product costing system assigns the following costs to canister production.

Direct material	$300 000
Direct labor (12 000 hours @ $15 per hour)	180 000
Variable overhead ($10 per direct labor hour)	120 000
Fixed overhead ($45 per direct labor hour)	540 000
Total cost	$1 140 000
Unit costs: 1 140 000/760 000	$1.50 per canister

Bells traditional make or buy analysis indicated that Catabas 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 manufacturing accountant, David Edwards, came to the rescue with an activity-based costing analysis of the decision. Edwards concluded that the activity driver levels associated with canister production are as follows:

10 product specs	30 inspections
2000 supervisory hours	15 setups
6000 material handling hours	70 000 machine hours
55 purchase orders

Additional traditional and ABC data from the South Yarra plant is given in Exhibit 19.17.

Required:

1. Show how Bell arrived at the $708 000 of cost savings in her traditional make or buy analysis.
2. Determine the cost that will be saved by purchasing the canisters using Edwards ABC data.
3. Complete the relevant costing analysis of the make or buy decision using the activity data. Should the firm buy from Cataba?
4. If the tradition and activity-based analysis yield different conclusions, briefly explain why.