Question

Bernhoff Corporation is considering outsourcing its legal work to an outside law firm. For the most recent year, the legal department incurred the following costs.

Chief Counsel		250,000
Attorneys (4)		410,000		Occupancy cost is allocated by the company to all departments, at the rate of $20/sqft.
Secretaries (3)		210,000		It consists of:		Depreciation (bldg)			55%
Interns (2)		20,000				Tax and insurance (bldg)			8%
Receptionist		30,000				Maintenance			22%
Total salaries		920,000				Utilities			15%
Payroll tax		75,000
Benefits		130,000		Legal research refers to subscriptions to research services and publications
Payroll cost		1,125,000
Occupancy		36,000
Travel		44,000
Legal research		30,000
		1,235,000

If the department is eliminated, one attorney will be retained as a liaison with the law firm, at a total payroll cost of $120,000.

She will occupy an office of 200 sq ft. Bernhoff currently has no plans for use of the vacated space.

Travel costs will be reduced by 90%, and research costs reduced by $25,000.

The law firm will bill attorney costs at a rate of $420/hr, which will include support staff costs.

It is expected that the first year, the law firm will bill 2,200 hours, plus $60,000 of direct costs.

A) Would Bernhoff's total expenses increase or decrease if the legal function were outsourced?

Show your calculations.

B) Assume that outsourcing would decrease expense. What other factors should Bernhoff consider before making the decision to outsource?

Answer 1