The business staff of the law firm Boston, Bailey and Bentley has constructed the following report which breaks down the firms overall results for last month into two business segments:family law and commercial law.

The cost of legal services is a result of the actual labor time and use of resources required to provide the legal services for each division and hence directly correlates to the division revenues. The fixed expenses are the items that are specifically traceable to each division. Selling and administrative expenses consist of the managing partners salary, general administrative expenses and general firm advertising. For convenience, these items are simply allocated to the two segments based on revenues from clients. The partners are concerned about the bottom line results of the family law segment. Ms. Bailey has suggested that the firm would be better off to concentrate on just the commercial law area and drop the family law segment since it is losing money. However, many of the firms commercial clients also use the firm for their family law requirements such as drawing up wills.

2) Another option being considered was initiated by the firms advertising agency. They have proposed an ad campaign targeted at boosting the revenues of the family law segment. The ad campaign would cost $20,000, and the advertising agency claims that it would increase family law revenues by $100,000. Mr. Boston, the managing partner of Boston, Bailey and Bentley believes this increase in business could be accommodated without any increase in fixed expenses. Estimate the effect this ad campaign would have on the family law segment margin and on the firms overall net operating income. Again the firm turns to you to help with this analysis. Prepare another segment margin statement showing the impact of this option. Give your recommendation for accepting or not accepting this proposal. Use the result of your segment report to support your recommendation. Be sure to clearly and completely explain your reasons.

Family commercial Law Law S1,000,000 S400,000 S600,000 Revenues from clients 220.000 100.000 120.000 Cost of legal services 570 000 280 390 000 Fixed expenses Gross margin 110.000 200000 90,000 Selling & administrative expenses 60000 24000 36.00 Rp4000 Net operating income (loss)