The business staff of the law firm Frampton, Davis & Smythe has constructed the following report whichbreaks down the firm’s overall results for last month into two main business segments— family law andcommercial law:Family CommercialTotal Law LawRevenues from clients .................. $1,000,000 $400,000 $600,000Variable expenses ........................ 220,000 100,000 120,000Contribution margin ...................... 780,000 300,000 480,000Traceable fixed expenses ............ 670,000 280,000 390,000Segment margin ........................... 110,000 20,000 90,000Common fixed expenses .............. 60,000 24,000 36,000Net operating income ................... $ 50,000 $ (4,000) $ 54,000However, this report is not quite correct. The common fixed expenses such as the managing partner’s salary, general administrative expenses, and general firm advertising have been allocated to the two segmentsbased on revenues from clients.Required:1. Redo the segment report, eliminating the allocation of common fixed expenses. Would the firm bebetter off financially if the family law segment were dropped? (Note: Many of the firm’s commerciallaw clients also use the firm for their family law requirements such as drawing up wills.)2. The firm’s advertising agency has proposed an ad campaign targeted at boosting the revenues ofthe family law segment. The ad campaign would cost $20,000, and the advertising agency claimsthat it would increase family law revenues by $100,000. The managing partner of Frampton, Davis& Smythe believes this increase in business could be accommodated without any increase in fixedexpenses. Estimate the effect this ad campaign would have on the family law segment margin and onthe firm’s overall net operating income.
The business staff of the law firm Frampton, Davis & Smythe has constructed the following report which
breaks down the firm’s overall results for last month into two main business segments— family law and
commercial law:
Family Commercial
Total Law Law
Revenues from clients .................. $1,000,000 $400,000 $600,000
Variable expenses ........................ 220,000 100,000 120,000
Contribution margin ...................... 780,000 300,000 480,000
Traceable fixed expenses ............ 670,000 280,000 390,000
Segment margin ........................... 110,000 20,000 90,000
Common fixed expenses .............. 60,000 24,000 36,000
Net operating income ................... $ 50,000 $ (4,000) $ 54,000
However, this report is not quite correct. The common fixed expenses such as the managing partner’s salary, general administrative expenses, and general firm advertising have been allocated to the two segments
based on revenues from clients.
Required:
1. Redo the segment report, eliminating the allocation of common fixed expenses. Would the firm be
better off financially if the family law segment were dropped? (Note: Many of the firm’s commercial
law clients also use the firm for their family law requirements such as drawing up wills.)
2. The firm’s advertising agency has proposed an ad campaign targeted at boosting the revenues of
the family law segment. The ad campaign would cost $20,000, and the advertising agency claims
that it would increase family law revenues by $100,000. The managing partner of Frampton, Davis
& Smythe believes this increase in business could be accommodated without any increase in fixed
expenses. Estimate the effect this ad campaign would have on the family law segment margin and on
the firm’s overall net operating income.
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