Problem 4: Break-Even point, Safety Margin; Law firm Lindon Smith 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, 1 staffed by a lawyer, paralegal, legal secretary, and clerk-receptionist for each of the two eight-hour shifts 6 hours each day from 7.00 a.m. to 11.00 p.m. The office would be In order to determine the feasibility of the project, Smith hired a marketing consultant to assist with market projections. The results of this study show that if the firm spends $490, 000 on advertising the first year, the number of new clients expected each day will be 50. Smith and his associates believe this number is reasonable and are prepare to spend the $490, 000 on advertising Other pertinent information about the operation of the office follows: The only charge to each new client would be $30 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 favourable settlements or judgements. Smith estimates that 20 percent of new client consultations will result in favourable settlements or judgements averaging $2,000 each. It is not expected that there will be repeat clients during 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 S10 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 Smith has located 6,000 square feet of suitable office space that rents for $28 per square foot annually. Associated expenses will be $27,000 for property insurance and S37,000 for utilities. It will be necessary for the group to purchase malpractice insurance, which is expected to cost S180,000 annually The initial investment in the office equipment will be S60,000. The equipment has an estimated useful life of four years. The cost of office supplies has been estimated to be $4 per consultation. Required: qu Determine how many new clients must visit the law office being considered by Lindon Smith and his colleagues in order for the venture to break even during its first year of operations Compute the law firm's safety margin. 2
