Steven Clark and two of his The intent is to provide easy access for their clien

Question

Steven Clark and two of his 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, Clark 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. Clark 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. Clark 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. • Clark has located 6,000 square feet of suitable office space which 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 Steven Clark and his colleagues in order for the venture to break even during its first year of operations. (Do not round intermediate calculations and round your final answer up to nearest whole number.) 2. Compute the law firm’s safety margin. (Round final answer to the nearest whole dollar amount.)

Explanation / Answer

Answer:1 In order to break even, during the first year of operations, 9404 clients must visit the law office being considered by Steven Clark and his colleagues as calculated below.

Fixed Expenses for First Year of Operations

Breakeven Calculation:

Revenues = Variable cost (supplies) + Fixed cost (from above)

73Q + ($5300 x .3 x .2)Q = $7Q + 3611106

Q= 9404 clients per year

Advertising 1045000 Rent (6000*$69) 414000 Property insurance 60500 Utilities 84400 Malpractice insurance 373000 Depreciation (133000/4) 33250 Wages and Fringe Benefits Regular wages (63+53+43+33)*16 hrs*360 days 1105920 Overtime wages (330*43*1.5+330*33*1.5) 37620 Total wages 1143540 Fringe benefits @ 40% 457416 1600956 Total Fixed expenses 3611106

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