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. 1. Number of new clients to break even 2. Safety margin

Answer 1

Determine How many New Clients must Visit
	Couple of Imporant Point to Note :
	Details
	Advertising Cost$	10,45,000
	Client Expected each day	63
As per Question , Number of days in Year		360
	Charge for New client $	73
	Contingency Basis fiorm earnings == 30%
	20%of new client - favourable Settlement each $ 5300
	Determined revenue amount
	Client Expected each day	63
	Charge for New client $	73
	As per Question , Number of days in Year	360
	( 63*$73*360)	16,55,640
	Add
	Fixed cost
	Advertising Cost$	10,45,000
	Rent (6000 Sq Ft*$69/ Sq ft)	4,14,000
	Associated Expenses
	Property Insurance	60,500
	Utilities	84,400
	Group purchase Malpractice Insurance	3,73,000
	Depreciation	33,250
	Investment in Equipmet =$133000
	Estimated useful Life = 4 Year
	($133000/4)
	Calculation of Wages(wn1)	16,00,956
	Total Hrs worked
	Total Fixed cost	36,11,106

Total Wages calculation -Wn1
Unit	Hrs ( as above )-a	Rate$/Hr-b	Wages$(a*b)	OH Hr	OH Rate/Hr	OH cost$	Total Wages $	Fringe Benefit$	Total Cost$
The lawyer	5760	63	3,62,880				3,62,880	1,45,152	5,08,032
The Paralegal	5760	53	3,05,280				3,05,280	1,22,112	4,27,392
The Legal Secretary	5760	43	2,47,680	330	64.5	21285	2,68,965	1,07,586	3,76,551
The Clerk reception	5760	33	1,90,080	330	49.5	16335	2,06,415	82,566	2,88,981
Total Wages									16,00,956

As per Question - Overtime rate 1.5 times of base rate
As per Question - Fringe Benefit =40% of Total Wages
Now we need to calculate Break Even Point
Assume X = Break Even Point
The only charge to each client ( new)$ 73
Smith estimate that 20% of new client consultant - Judgement Avg $ 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= 360 days
Total New client visited during period		22680
(360*63)
Margin of safety =Budgeted Sales Revenue - Break Even Sales
Budgeted Sale Revenue
$73*22680+(0.2*22680*$5300*0.3)
Budgeted Sale 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