You are working with a local landscape supply company. One of the possibilities that has consistently come up in conversation with the owners is making your own mulch instead of continuing to buy mulch in bulk from the distributer. As part of your presentation, you have been asked to do the research and make a recommendation to the company as to whether or not this course of action is financially prudent. The pertinent data is listed below. What should they do? A memo to the Owner of the landscape supply company is needed.
· Currently purchase mulch from a wholesaler for $17/yard.
· We sell mulch for $35/yard with a $30 delivery fee.
· Mulch has a shelf life of one year on our property.
· The chipper equipment is priced at $115,000 for a new model, $85,000 for a used model. The used model is 3 years old. This type of equipment generally has a 20 year useful life. Delivery, set-up on-site, and training is included. Our current mechanics can perform the necessary maintenance and repair on either model.
· Producing the mulch will cost approximately $10 per yard for the fuel to run the chipper, the colorant, the labor for the machine, and the raw wood.
· The town will provide some of the wood for the process at no cost from the brush collected from homeowners throughout the summer.
· In addition to the cost of the equipment, there will be about $10,000 in fixed costs associated with starting this project. Once the equipment is purchased and in-place, the company does not expect any fixed costs above and beyond those associated with the current operations.
· We have had issues in the past few years where our supplier of mulch did not have any available when we needed it for our customers. They have increased their prices each year, and driving and waiting at their pick-up location occupies our trucks and drivers.
· We currently purchase and sell 3,700 yards of mulch a year.
· We can purchase an add-on auto-bagger in the future for $30,000 and sell bagged mulch to homeowners from our store front. The average price for a bag of mulch at Home Depot and Lowes is $3.33 each. Each bag holds 2 cubic feet, and there are 27 cubic feet in a yard.
Your submission should be a memo to the Owner of the landscape supply company. It should be at least two pages in length, and provide a detailed cost and revenue analysis and specific recommendations. Think of this as a paid consultant’s report – your grade will be based on whether your memo is worth the money they would have spent on it. By its nature, this assignment has some ambiguity in it; you must deal with that through your analysis, or present options based on assumptions.