Question

Casey Jones and two 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 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, Casey hired a marketing consultant to assist with market projections. The results of this study show that if the firm spends $980,000 on advertising the first year, the number of new clients expected each day will be 50. Casey and associates believe this number is reasonable and are prepared to spend the $980,000 on advertising. Other pertinent information about the proposed operation of the office follows:

The charge to each new client would be $60 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. Casey estimates that 20 percent of new client consultations will result in favorable settlements or judgments averaging $4,000 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 $50 for the lawyer, $40 for the paralegal, $30 for the legal secretary, and $20 for the clerk-receptionist. Fringe benefit expense will be 40 percent of the wages paid. A total of 400 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.

Casey has located 6,000 square feet of suitable office space which rents for $56 per square foot annually. Associated expenses will be $54,000 for property insurance and $74,000 for utilities. It will be necessary to purchase malpractice insurance, which is expected to cost $360,000 annually.

The initial investment in the office equipment will be $120,000. This equipment has an estimated useful life of four years.

The cost of office supplies has been estimated to be $8 per expected new client consultation.

1. Determine how many new clients must visit the law office being considered by Casey and colleagues for the venture to break even during its first year of operations.

2. Compute the proposed law firm's safety margin.

Answer 1

Part 1 - New Clients for law firm to break even

Particulars		Amount
Advertising		$980000
Rent (6000 Square feet * $56 Per square feet)		$336000
Property Insurance		$54000
Utilities		$74000
Malpractice Insurance		$360000
Depreciation ($120000/4 year) Depreciation = Cost of asset/Estimated Life		$30000
Wages and fringe benefits
Regular wages ($50+$40+$30+$20)*16 hour*360	$806400
Overtime wages(200*$30*1.5) + (200*$20*1.5) Since rate of overtime is 1.5 of Normal hourly wages	$15000
Total Wages	$821400
Fringe Benefits (40% of total wages) ($821400*40%)	$328560	$1149960
Total Fixed Expenses		$2983960

Break Even Equation

Revenue = Variable cost + Fixed cost

Note - Revenue will include contingency revenue also

Contingency revenue is based on fees of ($4000*30%*20%) per client. It represents $4000 as predicted settlement amount * 20% which is favourable response by client Probablity * 30% which is the case going to firm

Let client = 'x'

$60x + ($4000*0.3*0.2)x = $8x + $2983960

$60x + $240x = $8x + $2983960

292x = $2983960

x = 10220 Clients

Part 2 - Calculation of Law firm's safety margin

Safety Margin = Sales revenue - Break even sales revenue

Number of clients = 50 clients * 360 days = 18000 clients for year

Revenue = ($60*18000) + ($4000*0.3*0.2)*18000 = $5400000

Break even sales = ($60*10220) + ($4000*0.3*0.2)*10220 = $3066000

Safety Margin = $5400000 - $3066000 = $2334000