Dinosaur Oil Company, Inc., is a large oil and gas producer headquartered in Utah. Historically, most of its operations have been in the continental United States. However, in the past decade, Dinosaur expanded its operations to 14 foreign locations where it operates alone or in conjunction with foreign companies or governments. Dinosaur currently maintains a large department of 73 highly trained tax specialists who report to the chief financial officer and assist in planning the tax impacts of management decisions for domestic and foreign operations. The tax department also prepares its many, complex tax returns. Dinosaur is considering eliminating its internal tax department and outsourcing all of its tax planning and tax return preparation to a large international business services firm. A cost-management team has prepared the following preliminary calculations:

DinosauTra x Operation Current costs AOVANMEMONMENEWENINS 5 oo cco no do mono: $ 900,000

(axe OlanniMG gra ate tereyeos Heri eee res 1,200,000 laxcretunnipreparatlonimain sre une aes 2,000,000 Required

a. What is the most that Dinosaur Oil Company should pay for tax services from an external provider if all but the information systems costs could be saved?

b. What considerations in addition to cost should be important to Dinosaur’s decision to outsource its tax services?

c. Evaluate a business services company’s offer to provide tax planning and return preparation services for $3 million per year. This offer is contingent, however, on Dinosaur’s acceptance of another offer from the business services company to improve Dinosaur’s tax information systems at a one-time cost of $1.5 million. This improvement should reduce annual costs of the information system by $300,000 per year for the next five years and greatly improve the accuracy and responsiveness of the system. (Ignore the time value of money.)