Sergo Games produced action video games, one of which sold more than 70,000 copies last year. The games need a special USB controller and the company operates its own production facility that manufactures and oackages the controllers for shipment to customers. In 2020, they lroduced 2,000,000 controllers and incurred the following costs: Units Produced (2,000,000), Labor ($600,000), Materials (4,000,000), Supervisor's salaries (200,000), Equipment depreciation (300,000), Utilities (100,000) and Total ($5,200,000). Unit Cost $5,200,000/2,000,000=$2.60 per unit.

William Stowers, controller, has been given the responsibilty to analyze outsourcing the production. His report is brovided below:

In 2020, total production costs were $5,200,000 or $2.60 per controller. The low-cost outside bidder for the production was Altergo, Inc. They are a highly respected company and their offer is $2.50 per controller. Although the savings relates to outsourcing is only $0.10 per unit, with annual production of 2 million units, this amounts to $200,000 per year. The present value of savings, with a five-year horizon and a 10% cost of capital is $758,157. Thus I recommend that we outsource the controller production. You also asked me to determine the selling orice of our existing production equipment. I showed it to Altergo's representatives. He said the equipment is dated and the market value is essentially zero. At any rate, they are not interested in purchasing the equipment even if we select them as a supplier. If we outsource, we cannot use the facility for another purpose. As you know, the building is run down and its not even a suitable space for programmers! Finally, I want to mention another issue that enhances the appeal of outsourcing. The equipment is currently on our books at $1,500,000 with an expected remaining life of 5 years. This generates $300,000 prr year of depreciation expense. If we outsource, we will have a $1,500,000 tax loss on disposal of equipment, which will save us approximately $525,000, assuming a 35% tax rate. Thus the total value of outsourcing is $758,157+$525,00=$1,283,157. Please call me if you have questions regarding this analysis.

Required: Do you agree with the analysis? Are his calcualtions correct? If not, show how you derived your answer? Should Sergo outsource to Altergo and why or why not?