We are a reputed law firm. We are thinking of hiring associates right out of college at $120,000 per year. Do you think it is a good idea?
The case is designed to be presented to the candidate by an interviewer, who plays the role of a representative of a reputed law firm.
Short Solution (Expand) (Collapse)
This is a basic profit = revenue - cost analysis case.
Does the firm have work for new associates? If yes, could you please provide the hourly/daily billing rate and the number of hours/days billed?
- Hourly billing rate: $50
- Number of hours billed per day: 8 hours
- Number of days worked per year: 300 days approximately
Should I consider any other cost apart from salary, taxes, overhead, training and recruitment costs?
- Training: $5,000
- Recruitment: $5,000
Let us first calculate the marginal revenue associated with adding a new lawyer.
Revenue for one year = Hourly bill rate * Daily billed hours * Days worked per year = 50*8*300 = $120,000
Costs: Total cost = Salary + training costs + recruitment costs = 120,000 + 5,000 + 5,000 = $130,000
A basic profit analysis tells us we will incur a loss of $10,000 per associate per year.
V. Concluding Observations
Hiring associates at $120,000 per year is not a good idea as a basic profit analysis shows a loss of $10,000 per associate per year. In case the salary figure is above market, we could consider offering a lower salary.
If the interviewee solves the case very quickly, you could discuss factors such as:
- Quality of lawyers
- Raises to be given in subsequent years
- Change in the associate's average tenure with the firm
- Option of hiring experienced lawyers or cheaper legal assistant, etc