Reference no: EM132796792

Case:

• Josef Manuel and two of his colleagues are considering opening a law firm 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.
• In order to determine the feasibility of the project, Josef hired a marketing consultant to assist with market projections. The results of this study show that if the firm spent P1,000,000 on advertising the first year, it could expect about 10 new clients each day. Josef and his associates believe the estimate to be reasonable and are prepared to spend the amount on advertising.

Other pertinent information about the operation of the firm follows:

1. The only charge to each new client would be P5,000 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. Josef estimates that 20% of new client consultations will result in favorable settlements or judgments averaging P100,000. Josef expects no repeat clients during the first year of operations.
2. The hourly wages of the staff are projected to be P500 for the lawyer, P350 for the paralegal, P250 for the secretary, and P200 for the clerk-receptionist. Fringe benefit expense will be 40% of the wages paid.
3. Josef has located 6,000 square feet of suitable office space that rent for P100 per square foot annually.
4. Associated expenses will be P28,000 for property insurance and P72,000 for utilities annually.
5. The group will purchase malpractice insurance for P2,000,000 annually.
6. The initial investment in office equipment will be P300,000, which will be depreciated over 5 years. The cost of office supplies has been estimated at P200 per expected new client consultation.

Required:

Problem 1. Determine the income the law firm can expect if all goes according to plan.

Problem 2. Determine how many new clients must visit the law firm for the venture to break even during its first year of operations.

Problem 3. Should Josef Manuel and his associates proceed with the opening of the law firm? Why?