Classifying Relevant and Irrelevant Items (LO1)

The law firm of Taylor, Taylor, and Tower has been asked to represent a local client. All legal proceedings will be held out of town in Chicago.

Required The law firm’s accountant has asked you to help determine the incremental cost of accepting this client.

Classify each of the following items on the basis of their relationship to this engagement. Items may have multiple classifications.

Relevant costs Irrelevant costs Opportunity Outlay Outlay Sunk 1. The case will require three attorneys to stay four nights in a Chicago hotel. The predicted hotel bill is $2,400.

Taylor, Taylor, and Tower’s professional staff is paid $2,000 per day for out-of-town assignments.

3. Last year, depreciation on Taylor, Taylor, and Tower’s office was $25,000.

4. Round-trip transportation to Chicago is expected to cost $250 per person.

5. The firm has recently accepted an engagement that will require partners to spend two weeks in Cincinnati. The predicted out-of-pocket costs of this trip are $8,500.

6. The firm has a maintenance contract on its computer equipment that will cost $2,200 next year.

7. If the firm accepts the client and sends attorneys to Chicago, it will have to decline a conflicting engagement in Miami that would have provided a net cash inflow of $15,000.

8. The firm’s variable overhead is $80 per client hour.

9. The firm pays $250 per year for Mr. Tower’s subscription to a law journal.

10. Last year the firm paid $3,500 to increase the insulation in its building.