Question

Dale Masters 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 these 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 8-hour shifts. To determine the feasibility of the project, Masters hired a marketing consultant to assist with market projections. The results of this study show that, if the firm spends $500,000 on advertising the first year, the number of new clients expected each day would have the following probability distribution. Number of New Clients per Day Probability 20 .10 30 .30 55 .40 85 .20 Masters and his associates believe these numbers are reasonable and are prepared to spend the $500,000 on advertising. Other pertinent information about the operation of the office is given below. The only charge to each new client would be $30 for the initial consultation. All cases that warranted further legal work would be accepted on a contingency basis with the firm earning 30% of any favorable settlements or judgments. Masters estimates that 20% of new client consultations will result in favorable settlements or judgments averaging $2,000 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 $25 for the lawyer, $20 for the paralegal, $15 for the legal secretary, and $10 for the clerk-receptionist. Fringe benefit expense will be 40% of the wage 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. Masters has located 6,000 square feet of suitable office space that rents for $28 per square foot annually. associated expenses will be $22,000 for property insurance and $32,000 for utilities. It will be necessary for the group to purchase malpractice insurance, which is expected to cost $180,000 annually. The initial investment in office equipment will be $60,000; this equipment has an estimated useful life of 4 years. The cost of office supplies has been estimated to be $4 per expected new client. Questions: 1. Determine how many new clients must visit the law office being considered by Don Masters and his colleagues for the venture to break even during its first year of operations. 2. Using the information provided by the marketing consultant, determine if it is feasible for the law office to achieve break-even operations.

Answer 1

Part 1 - New Clients for law firm to break even

Particulars		Amount
Advertising		$500000
Rent (6000 Square feet * $28 Per square feet)		$168000
Property Insurance		$22000
Utilities		$32000
Malpractice Insurance		$180000
Depreciation ($60000/4 year) Depreciation = Cost of asset/Estimated Life		$15000
Wages and fringe benefits
Regular wages ($25+$20+$15+$10)*16 hour*360	$403200
Overtime wages(200*$15*1.5) + (200*$10*1.5) Since rate of overtime is 1.5 of Normal hourly wages	$7500
Total Wages	$410700
Fringe Benefits (40% of total wages) ($410700*40%)	$164280	$574980
Total Fixed Expenses		$1491980

Break Even Equation

Revenue = Variable cost + Fixed cost

Note - Revenue will include contingency revenue also

Contingency revenue is based on fees of ($2000*30%*20%) per client. It represents $2000 as predicted settlement amount * 20% which is favourable response by client Probablity * 30% which is the case going to firm

Let client = 'x'

$30x + ($2000*0.3*0.2)x = $4x + $1491980

$30x + $120x = $4x + $1491980

146x = $1491980

x = 10220 Clients

Part 2 - Calculation of Law firm's safety margin

Safety Margin = Sales revenue - Break even sales revenue

Calculation of Number of clients per day

Clients (A)	Probablity (B)	Estimated clients (A*B)
20	0 1	2
30	0.3	9
55	0 4	22
85	0 2	17
	Total	50

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

Revenue = ($30*18000) + ($2000*0.3*0.2)*18000 = $2700000

Break even sales = ($30*10220) + ($2000*0.3*0.2)*10220 = $1533000

Safety Margin = $2700000 - $1533000 = $1167000