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Contentious Law Firm offers litigation, divorce, and estate planning services. The partners are concerned about...

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Accounting

Contentious Law Firm offers litigation, divorce, and estate planning services. The partners are
concerned about the profitability of their litigation business. If the firm drops the litigation work,
the lawyers might do more divorce work. The firm estimates that 20% of the fixed costs
associated with litigation would be eliminated and that the increase in divorce work revenue
(and variable costs) could be 50%. Following are recent income numbers:
Litigation Divorce Estate Planning
Sales $300,000 $500,000 $600,000
Variable costs (250,000)(300,000)(350,000)
Contribution
margin
$50,000 $200,000 $250,000
Fixed costs (50,000)(60,000)(80,000)
Income $ 0 $140,000 $170,000
a. Should the firm drop its litigation work? What would be the effect on income of just
dropping litigation without increasing divorce work?
b. Should the firm drop its litigation work and increase its divorce work? What would be the
effect on income?
c. Give three other factors that the firm should consider when evaluating whether to keep
or drop the litigation work.
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