Question

1 (10 points). John Milton and two of his colleagues are considering opening a law office in New York City 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. In order to determine the feasibility of the project, John 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 er Da 20 30 0.10 0.30 0.40 0.20 85 John 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 as follows. The only charge to each new client would be $30 for the initialconsultation. All cases that warranted further legal work would be accepted on a contingency basis with the firm earning 30 percent of any favorable settlements or judgments. John estimates that 20 percent of new client consultations will result in favorable settlements or judgments averaging $2,000 each. Repeat clients are not expected 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 expenses 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 wil apply to the full wages John has located 6,000 square feet of suitable office space, which 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 four years. The cost of office supplies has been estimated to be $4 per expected new client consultation a. Determine how many new clients must visit the law office being considered by John Milton and his colleagues in order for the venture to break even during its first year of operations b. Using the information provided by the marketing consultant, determine if it is feasible for the law office to achieve break-even operations

Answer 1

John Milton: - a) Break Even point Total Expenses Advertising 5,00,000 Staff wages Lawyer 144,000 = 25 times 360 times 8 times 2 = 144,000 Para legal 115,200 = 20 times 360 times 8 times 2 = 115,200 Legal secretary 86,400 = 15 times 360 times 8 times 2 = 86,400 clerk receptionist 57,600 = 10 times 360 times 8 times 2 = 57,600 Overtime Legal secretary 4,500 = 200 times 15 times 1.5 = 4500 clerk receptionist 3,000 = 200 times 10 times 1.5 = 3000 410,700 Fringe Benefit expenses 40% of wages (410700 times 40%) 164,280 Office rent (6000 times 28) 168,000 Associated expenses (22000 + 32000) 54,000 Malpractice insurance 180,000 Depreciation on office equipment 15,000 Cost of office supplies 4 times x 1491,980 + 4x = 60,000/4 = 15,000 Let 'x' be expected new client consultation \r\n Break Even point (30 times x) + (x times 20% times 2000 times 30%) = 14,91,980 + 4x