Park & Morgan, a law firm, is considering opening a legal clinic for midde- and
ID: 2505374 • Letter: P
Question
Park & Morgan, a law firm, is considering opening a legal clinic for midde- and low income clients. The clinic would bill at a rate if $18 per hour. It would employ law sudents as paraprofessional help and pay them $9 per hour. Other variable costs are anticipated to be $5.40 per hour, and annual fixed costs are expected to total $27,000.
1. Compute the breakeven point in billable hours
2. Compute the breakeven point in total billings.
3. Find the new breakeven point in total billings if fixed costs go up by $2340.
4. Using the original figures, compute the breakeven point in total billings if the billing rate decreases by $1 per hour, other variable costs decrease by $0.40 per hour, and fixed costs go down by $3600
Please explain your answers so I can better understand how to do these problems.
Explanation / Answer
number of hours worked = H
Revenues = $18 * H
Total variable costs = ($9 + $5.4) * H
Total fixed costs (per year) = $27000
Total costs (per year) = 27000 + 14.4H
1)point where costs equal revenues
18H = 27000 + 14.4H
18H - 14.4H = 27000
3.6H = 27000
H = 27000/3.6
H = 7500
In any given year, they must work 7500 billable hours to break even.
One person works about 7 hours per day, 5 days a week, 48 weeks of the year (subtracting holidays), so each person works about 1680 billable hours per year. You'll need about 5 law students every working day to cover the workload.
2)7500 billable hours at $18 per hour = $135,000
The breakeven point in billings is $135,000
3)New total cost function: (27000 + 2340) + 14.4H
Breakeven point where costs equal revenues
18H = 29340 + 14.4H
3.6H = 29340
H = 8150
New breakeven point = 8150 total billable hours per year.
4)Revenues = ($18 - $1) * H = 17H
Total costs (per year) = ($27000 - $3600) + ($9 + $5.4 - $0.4)H = 23400 + 14H
Breakeven...
17H = 23400 + 14H
3H = 23400
H = 7800