Project #159033 - break even point, safety margin

Business Tutors

Subject Business
Due By (Pacific Time) 12/08/2016 12:00 am

Steven Clark 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, Clark 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. Clark and his associates believe this

number is reasonable and are prepared to spend the $980,000 on advertising. Other pertinent information

about the operation of the office follows:

• The only 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. Clark 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.

• Clark 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 for the group 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.

 

 

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.

 

2. Compute the law firm’s safety margin.

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