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 day 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-hour shifts.
To determine the feasibility of the project, Masters hired a marketing consultant to assist with market projections. The results 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 is given below.
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 percent of any favorable settlements or judgments. Masters estimates that 20 percent of new client consultations will result in favorable settlements or judgments averaging $2,000. Masters expects no repeat clients during the 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 $10 for the clerk-receptionist. Fringe benefit expense will be 40 percent 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 four years. The cost of office supplies has been estimated at $4 per expected new client consultation.
Determine the income the law office can expect if all goes according to plan.
Determine how many new clients must visit the law office for the venture to break even during its first year of operations.