Argew, Bicker and Fight is a law firm that has three types of cases: Easy Wins,
ID: 2499721 • Letter: A
Question
Argew, Bicker and Fight is a law firm that has three types of cases: Easy Wins, Regular and Hard Wins. The firm has a department of each type of case. General firm-wide corporate fixed costs include costs that are unavoidable as long as the firm remains in business. In addition, each department also has some direct fixed costs including support staff employed entirely within each of the departments. The firm’s total fixed costs are shown below, along with other information for Year 1:
Year 1
Fixed Costs ($)
Fee per Case ($)
Variable Cost per Case ($)
Cases per Year
Easy Wins
500,000
3,000
1,800
1,000
Regular
700,000
4,000
2,200
400
Hard Wins
1,000,000
5,000
2,500
600
Corporate
365,000
---------------
-----------
Total
2,565,000
2,000
1. Using the above mix of cases, prepare the company’s income statement using the contribution margin format.
2. At the end of each year, the firm’s accountant allocates the general fixed costs to the departments in proportion to the number of cases and computes a profit figure for each department. Using this methodology, what would be the resulting operating profits for each department for Year 1?
3. Based on the information from (2), a member of the senior management team has suggested that the company profitability would be enhanced by eliminating the Hard Wins department? What would be the consequences of this proposed action? Do you recommend they proceed with senior management’s suggestion? Explain and show supporting computations.
4. In Year 2, the only change from Year 1 is a change in the product mix towards more of the Hard Win cases. Re-evaluate the proposal to streamline the number of departments. Do you recommend they proceed with senior management’s suggestion? Explain and show supporting computations
Year 2
# of cases
Easy Wins
500
Regular
200
Hard Wins
1,300
Year 1
Fixed Costs ($)
Fee per Case ($)
Variable Cost per Case ($)
Cases per Year
Easy Wins
500,000
3,000
1,800
1,000
Regular
700,000
4,000
2,200
400
Hard Wins
1,000,000
5,000
2,500
600
Corporate
365,000
---------------
-----------
Total
2,565,000
2,000
Explanation / Answer
1. Contribution margin Income Statement
Sales (1000*$3000 + 400*$4000+ 600*$5000) $7600000
Less: Variable Cost(1000*$1800+400*$2200+600*$2500) $4180000
Gross Contribution Margin $3420000
Less:Administrative Expenses -
Contribution Margin $3420000
Less: Fixed Cost $2565000
Net Profit $855000
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