Question

Terry Smith and two of his colleagues are considering opening a law office in a large metropolitan area that would make inexpensive legal services available to those who could not otherwise afford services. The intent is to provide easy access for their clients by having the office open 360 days per year, 16 hours each day from 7:00 a.m. to 11:00 p.m. The office would be staffed by a lawyer, paralegal, legal secretary, and clerk-receptionist for each of the two eight-hour shifts. In order to determine the feasibility of the project, Smith hired a marketing consultant to assist with market projections. The results of this study show that if the firm spends $1,045,000 on advertising the first year, the number of new clients expected each day will be 63. Smith and his associates believe this number is reasonable and are prepared to spend the $1,045,000 on advertising. Other pertinent information about the operation of the office follows: The only charge to each new client would be $73 for the initial consultation. All cases that warrant further legal work will be accepted on a contingency basis with the firm earning 30 percent of any favorable settlements or judgments. Smith estimates that 20 percent of new client consultations will result in favorable settlements or judgments averaging $5,300 each. It is not expected that there will be repeat clients during the first year of operations. The hourly wages of the staff are projected to be $63 for the lawyer, $53 for the paralegal, $43 for the legal secretary, and $33 for the clerk-receptionist. Fringe benefit expense will be 40 percent of the wages paid. A total of 660 hours of overtime is expected for the year; this will be divided equally between the legal secretary and the clerk-receptionist positions. Overtime will be paid at one and one-half times the regular wage, and the fringe benefit expense will apply to the full wage. Smith has located 6,000 square feet of suitable office space that rents for $69 per square foot annually. Associated expenses will be $60,500 for property insurance and $84,400 for utilities. It will be necessary for the group to purchase malpractice insurance, which is expected to cost $373,000 annually. The initial investment in the office equipment will be $133,000. This equipment has an estimated useful life of four years. The cost of office supplies has been estimated to be $7 per expected new client consultation. Required: 1. Determine how many new clients must visit the law office being considered by Terry Smith and his colleagues in order for the venture to break even during its first year of operations. (Round your final answer up to the next whole number.) 2. Compute the law firm’s safety margin.

Answer 1

Solution:-

Important points details as given :-

Advertising cost	$1,045,000
No. of days in year ,as per question	360
Client Expected each day	63
Charges for New clients	$73
20% of new clients - each favourable settlement	$5,300
Contingency basis from earnings	30%
Revenue Amount
Client Expected each day	63
Charges for New clients	$73
No. of days in year ,as per question	360
So, (63*$73*360)	1,655,640.00

FIXED COST
Advertising cost	$1,045,000
Rent (6000sq.ft*$69/sq ft.)	414,000
Expenses - Associated
Utilities	84,400
Property insurance	60,500
Group purchase Malpractices
Depreciation ($133000/4)	33,250
Insurance	373,000
Investment in equipment	133,000
Estimated useful life =4years
*($133000/4 = 33250)
CALCULATION OF WAGES(Wn-1)	1,600,956
Total Fixed Cost	3,611,106

WORKING NOTE:-
(1) TOTAL WAGES CALCULATION
UNITS	Hrs(as given above)-a	RATE$/Hr-b	Wages$ (a*b)	OH Hr	OH rate/hr	OH Cost $	Total Wages $	Fringe benefits	Total cost $
Lawyer	5760	63	362,880				362,880	145,152	508,032
Paralegal	5760	53	305,280				305,280	122,112	427,392
Legal Secretary	5760	43	247,680	330	64.5	21,285	268,965	107,586	376,551
The clerk reception	5760	33	190,080	330	49.5	16,335	206,415	82,566	288,981
TOTAL WAGES	1,600,956

As per question -

Overtime rate 1.5 times of base rate

Fringe benefits = 40% of wages

Now we have to calculate Break Even Point

Lets assume X = Break even point

Charge only to new clients= $73

Terry Smith estimated that 20% of new client consultant - JudgementAverage $5300

Firm earning 30% of any favourable settlement

$73x+(0.2x*$5300*0.3)-$7x-3611106

$73x+$318x-7x-$3611106

X*($384) $3611106

X= (Break Even Point 9,404

New client expected each day = 63

Number of days in year = 360days

Total New client visited during period 22680

(360*63)

Margin of safety = Budgeted sales revenue- Break even point

Budgeted sales revenue

$73822680+(0.2-22680*$5300*0.3)

Budgeted sales revenue $ =A 8,10,34,920

$73822680+$7212240

Break Even sales=B $ 36,76,964

$73*9404+(0.2*9404*$5300*0.3)

$686492-$2990472

Margin Of Safety (A-B) $ 7,73,57,956