John Menard is the founder and sole owner of Menards. Analysts have estimated that his c...

John Menard is the founder and sole owner of Menards. Analysts have estimated that his chain of home improvement stores scattered around nine Midwestern states generate about $3 billion in annual sales. But how can Menards compete with giant Home Depot?

Suppose Menard is trying to decide whether to invest $45 million in a state-of-the-art manufacturing plant in Eau Claire, Wisconsin. Menard expects the plant would operate for 15 years, after which it would have no residual value. The plant would produce Menards’ own line of Formica countertops, cabinets, and picnic tables.

Suppose Menards would incur the following unit costs in producing its own product lines:

Rather than making these products, assume that Menards could buy them from outside suppliers. Suppliers would charge Menards $40 per countertop, $25 per cabinet, and $65 per picnic table.

Whether Menard makes or buys these products, assume that he expects the following annual sales:

Countertops—487,200 at $130 each

Picnic tables—100,000 at $225 each

Cabinets—150,000 at $75 each

If “making” is sufficiently more profitable than outsourcing, Menard will build the new plant. John Menard has asked your consulting group for a recommendation. Menard uses the straight-line depreciation method.

Requirements

1. Are the following items relevant or irrelevant in Menard’s decision to build a new plant that will manufacture his own products?

a. The unit sale prices of the countertops, cabinets, and picnic tables (the sale prices that Menards charges its customers)

b. The prices outside suppliers would charge Menards for the three products, if Menards decides to outsource the products rather than make them

c. The $45 million to build the new plant

d. The direct materials, direct labor, and variable overhead Menards would incur to manufacture the three product lines

e. John Menard’s salary

2. Determine whether Menards should make or outsource the countertops, cabinets, and picnic tables, assuming that the company has already built the plant and, therefore, has the manufacturing capacity to produce these products. In other words, what is the annual difference in cash flows if Menards decides to make rather than outsource each of these three products?

3. Write a memo giving your recommendation to John Menard. The memo should clearly state your recommendation, along with a brief summary of the reasons for your recommendation.