Cost–based pricing in a not–for–profit organization Mountain County Legal Services is part of a larger not–for–
profit organization (Mountain County Resource Center) that provides free legal and job placement services and
houses a food bank for qualified clients. Last year’s costs for 5,000 visits to legal services are presented here.
Expected grants for the next year from United Way and the county have been reduced due to an economic downturn. The
organization’s executive director is considering dropping legal services. Eliminating the legal services program will result in
a savings of about $4,000 in administrative costs. The space vacated by legal services could be used by the food bank, which
is presently renting quarters in another building for $8,000 a year.
The executive director decided that individuals receiving legal services from the resource center are to pay for their services,
with exceptions based upon need determined on a case–by–case basis. It is not clear what the director means when he says
that clients are to pay for their services
REQUIRE
D: • A. If the executive director means that each person using legal services should pay for his or her own
avoidable costs, what minimum fee should be charged on average for a legal service visit?
B. If the executive director means that all of the people using legal services should collectively pay for the avoidable costs of the legal services program, what minimum fee should be charged on average for a visit?
• C. If the executive director wants the fee to cover the total costs of the Mountain County Legal Services
including avoidable and allocated costs, what minimum fee should be charged for a visit?
• D. Suppose the Center begins charging the price you calculated in part (B). What problems might arise if
these fees are implemented? Consider whether the price change would affect the client’s behavior, and then
how that behavior change might affect Legal Services.
• E. Suppose the Center begins charging the price you calculated in part (C). Considering that the price is
based on allocated costs, explain why this price might be viewed as arbitrary.
• F. Discuss why a county executive might issue an edict about having clients pay for their services, but not
provide guidance about what the edict means.
