Three graduates who recently graduated from the College of Law are considering opening a law office in that would make inexpensive legal services available to those who could not afford these services elsewhere. The intent is to provide easy access for their clients by having the office open 300 days a year, 8 hours each day from 8 A.M. to 4 P.M. The office will be staffed by a lawyer, assistant, secretary, and receptionist. To assist with market projections and to determine the feasibility of this project, the three graduates hired a management accountant who graduated from the College of Business and Economics of 8 years ago. The results of this market study show that if the firm spends USD 500,000 on advertising in the first year, the number of new clients expected each day may have the following probability distribution: Number of new clients per day   Probability            Expected Outcome 20                                 0.1                                2 30                                 0.3                                9 55                                 0.4                                22 85                                 0.2                                17 Total Clients per day                                                              50 Total Clients per year (50 clients * 300 days)                            15,000 The three graduates believe these numbers are reasonable and are prepared to spend USD 500,000 on advertising. Other related information about the operation of the office is as follows: The only charge to each new client would be USD 100 for the initial consultation. In addition to the initial consultation fee, for all cases that are warranted further legal work, the law office shall be earning 30% of any favorable settlements. It is expected that 20% of new client consultations will result in favorable settlements averaging USD 5,000 each. Therefore, each favorable settlement shall result in USD 300 (USD 5000 * 30% * 20%). The hourly wages are projected to be as follows: Staff            Wage/ hour Wage/Day (8 hours)        Wage/Year (300 days) Lawyer                 250                      2,000                             600,000 Assistant               200                      1,600                             480,000 Secretary               150                      1,200                             360,000 Receptionist             100                      800                               240,000 Total Wages/Year                                                                       1,680,000 Thelawyershavelocated 800 squarefeetofsuitableofficespace,which is rented for USD 1,000 per square foot annually. Annual property insurance will be USD 22,000 and USD 32,000 for utilities, also annually. The initial investment in office equipment will be USD 300,000;with an estimated useful life of 5 years. The cost of office supplies has been estimated to be USD 50 per client. Q: Using the information provided by the management accountant, determine the feasibility of the project, explaining the margin of safety and profitability of the project during the first year. Provide numbers that corroborate what you might find

Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
icon
Related questions
Question

Three graduates who recently graduated from the College of Law are considering opening a law office in that would make inexpensive legal services available to those who could not afford these services elsewhere. The intent is to provide easy access for their clients by having the office open 300 days a year, 8 hours each day from 8 A.M. to 4 P.M. The office will be staffed by a lawyer, assistant, secretary, and receptionist.

To assist with market projections and to determine the feasibility of this project, the three graduates hired a management accountant who graduated from the College of Business and Economics of 8 years ago. The results of this market study show that if the firm spends USD 500,000 on advertising in the first year, the number of new clients expected each day may have the following probability distribution:

Number of new clients per day   Probability            Expected Outcome

20                                 0.1                                2

30                                 0.3                                9

55                                 0.4                                22

85                                 0.2                                17

Total Clients per day                                                              50

Total Clients per year (50 clients * 300 days)                            15,000

The three graduates believe these numbers are reasonable and are prepared to spend USD 500,000 on advertising.

Other related information about the operation of the office is as follows:

  • The only charge to each new client would be USD 100 for the initial consultation. In addition to the initial consultation fee, for all cases that are warranted further legal work, the law office shall be earning 30% of any favorable settlements. It is expected that 20% of new client consultations will result in favorable settlements averaging USD 5,000 each. Therefore, each favorable settlement shall result in USD 300 (USD 5000 * 30% * 20%).
  • The hourly wages are projected to be as follows:

Staff            Wage/ hour Wage/Day (8 hours)        Wage/Year (300 days)

Lawyer                 250                      2,000                             600,000

Assistant               200                      1,600                             480,000

Secretary               150                      1,200                             360,000

Receptionist             100                      800                               240,000

Total Wages/Year                                                                       1,680,000

  • Thelawyershavelocated 800 squarefeetofsuitableofficespace,which is rented for USD 1,000 per square foot annually. Annual property insurance will be USD 22,000 and USD 32,000 for utilities, also annually.
  • The initial investment in office equipment will be USD 300,000;with an estimated useful life of 5 years.
  • The cost of office supplies has been estimated to be USD 50 per client.

Q: Using the information provided by the management accountant, determine the feasibility of the project, explaining the margin of safety and profitability of the project during the first year. Provide numbers that corroborate what you might find

Expert Solution
steps

Step by step

Solved in 3 steps with 2 images

Blurred answer
Similar questions
Recommended textbooks for you
Practical Management Science
Practical Management Science
Operations Management
ISBN:
9781337406659
Author:
WINSTON, Wayne L.
Publisher:
Cengage,
Operations Management
Operations Management
Operations Management
ISBN:
9781259667473
Author:
William J Stevenson
Publisher:
McGraw-Hill Education
Operations and Supply Chain Management (Mcgraw-hi…
Operations and Supply Chain Management (Mcgraw-hi…
Operations Management
ISBN:
9781259666100
Author:
F. Robert Jacobs, Richard B Chase
Publisher:
McGraw-Hill Education
Business in Action
Business in Action
Operations Management
ISBN:
9780135198100
Author:
BOVEE
Publisher:
PEARSON CO
Purchasing and Supply Chain Management
Purchasing and Supply Chain Management
Operations Management
ISBN:
9781285869681
Author:
Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson
Publisher:
Cengage Learning
Production and Operations Analysis, Seventh Editi…
Production and Operations Analysis, Seventh Editi…
Operations Management
ISBN:
9781478623069
Author:
Steven Nahmias, Tava Lennon Olsen
Publisher:
Waveland Press, Inc.