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After working in an established law firm for a couple of years, Stephen Lee is considering opening a law office 'Lee and Associates' to serve an
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# After working in an established law firm for a couple of years, Stephen Lee is considering

opening a law office "Lee and Associates" to serve an under-serviced segment - the small

and medium-sized enterprises.

This law office would provide easy access to clients with opening hours from 7am to

11pm (16 hours) everyday, 360 days a year. For each of two eight-hour shifts, a lawyer,

paralegal, legal secretary and clerk-cum-receptionist will staff the office.

A marketing consultant was contracted to assist with market projections as part of the

feasibility study. The consultant projected that if the firm spends \$1,960,000 on

advertising in the first year, the expected number of new clients each day would have the

following probability distribution:

Number of New Clients per Day Probability

20 0.1

40 0.1

50 0.4

60 0.4

ACC210 Copyright © 2020 Singapore University of Social Sciences (SUSS) Page 6 of 8

Timed Online Assignment - January Semester 2020

Stephen and his associates believed these numbers to be reasonable and were prepared

to spend the \$1,960,000 on advertising. Further information relating to the feasibility

study were as follows:

 Each new client would be charged \$120 for the initial consultation. The

firm would also charge a contingency fee equivalent to 30 per cent of any

favourable settlements or judgements on the cases that warrant further

legal work. Stephen estimated that 20 per cent of new client consultations

would result in favourable settlements or judgements averaging \$8,000

each. He did not expect any repeat clients during the first year of

operations.

 The hourly wages of the staff were budgeted as follows:

Lawyer 100

Paralegal 80

Legal secretary 60

Clerk-cum-receptionist 40

 Staff related costs would be 40 per cent of wages paid. 400 hours of

overtime is expected for the year, which would be divided equally

between the legal secretary and the clerk-cum-receptionist. Overtime

would be paid at 1.5 times the regular wage, and the staff related costs

would apply to total wages paid.

 Stephen had scouted for a suitable office of 6,000 square metres at an

annual rent of \$672,000. Management fees payable to the building owner

was estimated at \$108,000 and power and utilities at \$148,000 annually.

 Professional indemnity insurance was expected to cost \$720,000

annually.

 The capital investment in renovation and office equipment would be

\$300,000. Renovation and office equipment would be depreciated over its

estimated useful life of five years, on a straight-line basis.

 Office supplies, including printing and stationery, was estimated to be \$16

per new client consultation.

Required:

(a) Apply cost-volume-profit analysis to derive the breakeven number of clients for

the firm's first year of operations.

(11 marks)

(b) Using the probability information provided by the marketing consultant for year

1, analyse and show clear computations to explain whether it is feasible to open

the law office.

(3 marks)

ACC210 Copyright © 2020 Singapore University of Social Sciences (SUSS) Page 7 of 8

Timed Online Assignment - January Semester 2020

(c) Calculate the firm's margin of safety in absolute terms (\$) and in ratio. Provide

to the firm.

(8 marks)

(d) There are a number of key assumptions underlying the cost-volume-profit model.

Explain how two (2) of these assumptions are applicable to your analysis for the

firm.

(4 marks)

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