TEAM PROJECT T8-61 Assess information relevant to an outsourcing decision (Learning Objective 7) Shyhrete Berisha is the founder and sole owner of Berisha. Analysts have estimated that his chain of home improvement stores scattered throughout the provinces and territories generate about $3 billion in annual sales. But how can Berisha compete with giant Home Depot? Suppose Berisha is trying to decide whether to invest $45 million in a state-of-the-art manufacturing plant in the Okanagan. Berisha expects the plant would operate for 15 years, after which it would have no residual value. The plant would produce Berisha's own line of formica countertops, cabinets, and picnic tables. Suppose Berisha incurred the following unit costs in producing its own product lines: Per Unit Cabinets $10 Picnic Tables Countertops $15 10 Direct materials Direct labour Variable manufacturing overhead $25 5 15 5 2 6 Rather than Berisha making these products, assume that he can buy them from outside suppliers. Suppliers would charge Berisha $40 per countertop, $25 per cabinet, and $65 per picnic table. Whether Berisha 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 the products is sufficiently more profitable than outsourcing, Berisha will build the new plant. Shyhrete Berisha has asked your consulting group for a recommenda- tion. Berisha uses the straight-line depreciation method. Requirements 1. Are the following items relevant or irrelevant in Berisha'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 Berisha charges its customers) b. The prices that outside suppliers would charge Berisha for the three products if Berisha decides to outsource the products rather than make them c. The $45 million to build the new plant d. The direct materials, direct labour, and variable overhead that Berisha would incur to manufacture the three product lines e. Berisha's salary 2. Determine whether Berisha should make or outsource the countertops, cabinets, and picnic tables assuming that the company has already built the plant and, therefore, has the manu- facturing capacity to produce these products. In other words, what is the annual difference in cash flows if Berisha decides to make rather than outsource each of these three products? 3. Write a memo giving your recommendation to Berisha. The memo should clearly state your rec- ommendation and briefly summarize the reasons for your recommendation
