Your client, Dale, is the president and sole stockholder of a steel fabrication company. He has been planning to buy a new piece of equipment. He is upset to learn that the $500,000 cost would have to be depreciated over seven years. He comes to you with an idea from his son, Max, who is taking an introductory accounting class at the local college. Max has told his father that self-constructed assets are accounted for differently than purchased assets and that the company could be better off if it constructed the needed equipment. Dale figures hisregular employees could indeed build the new equipment using the company's ile capacity. For several years the company has been operating at 80% of capacity and that level of production is used as the denominator lefvel for the allocation of overhead. Overhead is currently charged to production at 150% of direct labor cost, but Max says the new equipment will not bear any overhead costs because the company has idle capacity and all overhead costs are already absorbed by regular production. Dale expects to incut the following:

Direct Materials - $120,000; Direct labor - $300,000; Other direct costs - $30,000; Interest on construction loan - $50,000 for a total of $500,000.

Although the cost is the same regardless of whether Dale makes or buys the equipment, he feels better off under the construction alternative becuase interest is deductible in the year incurred. As a result the depreciable cost would only be $450,000. Do you agree with Dale's analysis? why or why not? What are your recommendations for optimizing Dale's tax situtation?