The Case
Don Masters 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 these services. The intent is to provide easy access for their clients by having the office open 360 days per year, 16 hours each from 7 a.m. to 11 p.m. The office would be staffed by a lawyer, paralegal, legal secretary, and clerk-receptionist for each of the two 8 hours shift.
In order to determine the feasibility of the project, Masters hired a marketing consultant to assist with market projections. The result of this study show that if the firm spent $500,000 on advertising the first year, it could expect about 50 new clients each day. Masters and his associates believe the estimate to be reasonable and are prepared to spend the $500,000 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 warranted further legal work would be accepted on a contingency basis with the firm earning 30% of any favorable settlements or judgments. Masters estimates that 20% of new client consultations will result in favorable settlements or judgments averaging $2,000.00. Masters expects no repeat clients during the first year of operations.
The hour wages of the staff are projected to be $25 for the lawyer, $20 for the paralegal, $15 for the legal secretary, and $10 for the clerk-receptionist. Fringe benefit expense will be 40% of the wages paid.
Masters has located 6,000 square feet of suitable office space that rents for $28 per square foot annually. Associated expenses will be $22,000 for property insurance and $32,000 for utilities. The group will purchase malpractice insurance for $180,000 annually. The initial investment in office equipment will be $60,000, which will be depreciated over 4 years. The cost of office supplies has been estimated at $4 per expected new client consultation.
Required:
1. Determine the income the law office can expect if all goes according to plan.
2. Determine how many clients must visit the law office for the venture to break even during its first year of operations.
3. Write a memorandum stating whether Masters and his associates should proceed.
Requirement 1:
Given:
| Number of days: |
360 days |
| Number of hours per day: |
16 |
| Projected clients per day: |
50 clients |
| Projected clients per year: |
18, 000 clients
|