Inplementing Accounting Analysis

769 Words Oct 3rd, 2014 4 Pages
1. How does PPLS create value for its customers? What are the critical risks that it has to manage well?
2. How did the pre-1995 commission formula work? Why do you think the company changed its policy?
3. Based on the post-1995 commission formula and information in the case on pricing and commission rates, calculate the cash inflows for premiums and cash outflows for commissions for years 1 to 3 that would arise from the sign-up of 1000 new members at the beginning of year 1. Assume that: (a) actual member renewal rates are 75% for both years 2 and 3, and (b) 25% of recoverable commission advances in each of years 2 and 3 are expected to prove uncollectible.
4. How does Pre-Paid Legal account for the transactions described in
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As a result, lawyers have incentives to provide a higher quality service (by billing for additional time) than their clients would like. PPLS service changes lawyers’ incentives. Under the closed panel plan, lawyers receive a flat fee per client, and have little incentive to spend excessive hours providing higher quality services to their clients. Under the open plan, PPLS monitors attorney billing to ensure that it is appropriate. In both cases PPLS has provided incentives for lawyers to internalize the costs of providing legal services and to manage billable hours. PPLS’s approach is again similar to that provided by the use of capitation fees for doctors by HMOs in the health industry to change doctors incentives for performing additional tests on patients.
Screen lawyers for clients. It is costly for clients to screen lawyers to decide which lawyer to hire. PPLS does this for its clients. What are the business risks for PPLS?

Students are quickly able to see that PPLS faces an adverse selection problem. Yet the company presumably prices its service on the premise that it will attract a broad range of clients who expect that they may need to use legal services at some unknown point and want to insure these costs. However, they do not know when they will need to use the service. Students will point out that this model does not work if the company attracts
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