A lawyer allocates overhead costs based on his hours working with different clie

Question

A lawyer allocates overhead costs based on his hours working with different clients. The lawyer expects to have $200,000 in overhead during the year and expects to work on clients' cases 2,000 hours during the year. In addition he wants to pay himself $50 per hour for working with clients. The lawyer, however, does not bill all of his clients based on covering overhead costs and his own salary. Some clients pay her on contingency fees. If the lawyer works with a client on a contingency fee basis, the lawyer receives half of any settlement for his client. During the year the lawyer works 1,200 hours that are billable to clients. The remaining hours are worked on a contingency basis. The lawyer wins $300,000 in settlements for his clients of which he receives half. Actual overhead was $210,000,


a. What does the lawyer earn during the year after expenses?

Explanation / Answer

Hi, The only other possible option is to allocate overheads on the basis of number of hours worked. Overhead rate per hour would be $100 (200000/200). Based on this information we can calculate income as follows: Overhead Cost for Billable Hours: 1200 * 100 = 120000 + Actual Overhead for Contingency Fees = 210000 Therefore, total overhead cost would be 360000 against net income of 1200 * 50 = 60000 + 300000/2 = 150000 Net loss would be = 210000 - 360000 = 150000 Please let me know if you were looking for this approach. Thanks, Aman

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