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 $1,060,000 on advertising the first year, the number of new clients expected each day will be 66. Smith and his associates believe this number is reasonable and are prepared to spend the $1,060,000 on advertising. Other pertinent information about the operation of the office follows: • The only charge to each new client would be $76 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 $5,600 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 $66 for the lawyer, $56 for the paralegal, $46 for the legal secretary, and $36 for the clerk-receptionist. Fringe benefit expense will be 40 percent of the wages paid. A total of 720 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 $72 per square foot annually. Associated expenses will be $62,000 for property insurance and $86,800 for utilities. • It will be necessary for the group to purchase malpractice insurance, which is expected to cost $376,000 annually. • The initial investment in the office equipment will be $136,000. This equipment has an estimated useful life of four years. • The cost of office supplies has been estimated to be $10 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

Computation of Annual Costs of Employees
	Lawyer	Paralegal	Legal Secretary	Cleark Receptionist
No. of employees	2	2	2	2
Hourly rate	66	56	$                46.00	36
Frieng Benefit Tax @40%	26.4	22.4	$                18.40	14.4
Total Normal Pay per hour	92.4	78.4	$                64.40	50.4
Pay for Over Time	138.6	117.6	$                96.60	75.6
No. of Hours Worked per year	2880	2880	2880	2880
Over Time	0	0	180	180
Normal Pay	$ 532,224.00	$ 451,584.00	$      370,944.00	$ 290,304.00
Over time Pay	$                   -	$                   -	$        34,776.00	$    27,216.00
Total Wages	$ 532,224.00	$ 451,584.00	$      405,720.00	$ 317,520.00
Projected Expenses for a Year
Advertisement			$ 1,060,000.00
Lawyer			$      532,224.00
Paralegal			$      451,584.00
Legal Secretary			$      405,720.00
Cleark Receptionist			$      317,520.00
Office Space Rent @$72 per sq. feet for 6000 sq. ft.			$      432,000.00
Property Insurance			$        62,000.00
Utilities			$        86,800.00
MalPractice Insurance			$      376,000.00
Office Equipment apportioned for a year			$        34,000.00
Expected Total Annual Expense			$ 3,757,848.00
Projected Incomes
No. of Clients Per day	66
Working Days	360
Total Clients per year	23760
Client Fee net of variable expenses @76-10 per client			$ 1,568,160.00
No. of Judgements setteled as favourable		4752
Settelement Amount per Case		5600
30% of settelement amount recoverable by firm		1680
Receipts from Favourable Judgements			$ 7,983,360.00
Expected Total Annual Incomes			$ 9,551,520.00
The Breakeven states where the Projected Incomes are enough to Cover Projected Expenses
Let the Break even annual No of clients be x
We have,
=( x *66 ) + (x * .2 * 1680 )   = 3757848.00
=66x + 336x    = 3757848.00
=402 x    = 3757848.00
= x    = 3757848.00 / 402
9347.880597
which means the Break even no. of clients is 9348
Safety Margin =    (Current Client - Breakeven no. of Clients ) x 100                                                       Current no. of clients
Safety Margin =    (23760 - 9348 ) x 100                                                23760
Safety Margin =	60.65%