A firm of lawyers offering one-stop resolution of legal problemshas three types of cases: Regular, Difficult, and Extra Difficult. The firm is organized into departments. Each department is responsible for one of the case types. General firmwide corporate fixed costs include costs that are unavoidable as long as the firm remains in business. In addition, each department also has some direct fixed costs, including costs of support staff employed within each of the departments. The firms total fixed costs are shown below, along with other information for Year 1:

a) Using the above mix of cases, prepare the companys operating income statement for Year 1, using a multiproduct contribution margin format. Include but do not allocate corporate fixed costs.

(b) At the end of each year, the firms accountant allocates the general fixed costs to the departments in proportion to the number of cases and computes a bottom line profit figure for each department. Using this methodology, what would be the resulting operating profits for each department for Year 1?

(c) Based on the information from (b), a member of the senior management team has suggested that company profitability would be enhanced by eliminating the Difficult Department. Explain to senior management, what you believe would be the consequences of this proposed action. Also provide and justify your own recommendation. Include appropriate computations.

(d) In Year 2, the only change from Year 1 is a change in the product mix towards more of the extra difficult cases:

Year 2 # Cases Regular Department 500 Difficult Department 200 Extra Difficult Department 1,300 Re-evaluate the proposal to streamline the number of departments. Include an analysis of the immediate financial consequences (as indicated by the available data) and describe three key other factors that you think the firm should consider in making this decision.

Variable Fee per Cost per Cases per Year Fixed Costs ($) 500,000 700,000 1,000,000 365,000 2,565,000 Year 1 Regular Department Difficult Department Extra Difficult Department Corporate Total Case ($) 3,000 4,000 5,000 Case ($) 1,800 2,200 2,500 1,000 400 600 2,000