8.43 Break-even analysis; safety margin: service firm 8.5 Steven Clark and two of his colleagues are considering opening a law office in Sydney that would make Inexpensive legal advice available to those who could not otherwise afford legal 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 am to 11 pm. The office would be staffed by a lawyer, a paralegal, a legal secretary and a clerk-receptionist for each of the two eight-hour shifts. 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 $1 470 000 on advertising in the first year, 50 new clients are expected each day. Clark and his associates believe that this number is realistic and are ART FOUR INFORMATION FOR CREATING VALUE prepared to spend the $1470 000 on advertising. Other pertinent information about the operation of the proposed business follows: The only charge to each new client would be $90 for the initial consultation. All cases that warrant further legal work would be accepted on a contingency basis, with the firm entitled to 30 per cent of any favourable settlements or judgments. Clark estimates that 20 per cent of new client consultations will result In favourable settlements or judgments averaging $6000 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 $75 for the lawyer, $60 for the paralegal, $45 for the legal secretary and $30 for the clerk-receptionist. Labour on-costs will be 40 per cent of 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-a-half times the regular wage, and the labour on-costs will apply to the total wages paid. Clark has located 6000 square metres of suitable office space that can be rented for $84 per square metre annually. Associated expenses will be $81000 for council rates and $111000 for utilities. It will be necessary for the group to purchase professional indemnity insurance, which is expected to cost $540 000 annually. The initial investment in office equipment will be $180000. This equipment has an estimated useful life of four years. The cost of office supplies has been estimated at $12 per 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 operation. 2. Calculate the law firm's safety margin. 3. Describe the assumptions that underlie your analysis and the limitations that they imply