Northeast Reinsurance Company is growing rapidly. As it has grown, it has added legal staff to provide for its legal services. One of the principals of the company is an attorney who has provided oversight over the growing legal department. However, she is now too busy to continue this “legal counsel” role. She suggests that the senior company attorney become an officer of the company and be given the title “legal counsel and secretary.” Another of the principals is good friends with an attorney at a prestigious regional law firm. That law firm has offered to provide Northeast with legal services for an annual retainer of $500,000 plus an average billing rate of $100 per hour for all work done over 5,000 hours per year. It is expected that legal work, whether done inside or outside the company, will require about 6,000 hours this coming year and will probably increase by 10% a year thereafter. The current company legal staff may be able to handle the workload for two years before it will have to hire another attorney (at an expected salary and benefit package of $100,000).

Other variable costs are expected to increase by 5% a year.

Additional information follows:

Current Costs of Internal

Legal Department

Salaries and benefits of legal staff . . . . . . . . . . . . . . . . . . . . . . . . . . . $350,000

Travel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000

Required continuing education costs. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000

Legal support costs (library, computers, software, supplies, etc.) . . . . 100,000

Other variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000

Allocated office overhead (depreciation, utilities, etc.) . . . . . . . . . . . . . 40,000

Total costs of legal department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $605,000

Required:

1. What are the relevant costs for Northeast to consider in making this decision?

2. From a financial standpoint, should Northeast continue to use its own legal department for legal services or outsource this function to the regional law firm?

3. What other factors might Northeast consider in making this decision?