Question

Assume you have been retained as an expert witness for a client who is the defendant in the case, and your client is alleged to have breached a contract and caused damages of $3,000,000 which includes added costs and lost profits. The contract required that your client supply hardwood lumber to a furniture manufacturer for a three-year period. After six months your client found it could not supply the lumber in the quantity required by the plaintiff in the case and quit shipping lumber. Your client states that there is no way the damages could be anywhere near the amount alleged in the suit because your client was selling hardwood lumber to the plaintiff at “about the market rate.” The plaintiff alleges that because it could not get the lumber from our client, it had to buy in the open market, and it paid more for the lumber and lost production output and gross margin on its furniture products. Your preliminary analysis of the case data finds the following:

1. The plaintiff purchased a total $1,200,000 of hardwood lumber from your client during the first six months of the contract.

2. Your client was supplying hardwood lumber under the contract at about eight percent below market rate for similar hardwood sales.

. The plaintiff’s average gross margin on sales is 35 percent and its average profit on sales is 10 percent.

4. The plaintiff’s average sales volume over the last five years has been $10,000,000 per year.

5. During the six months immediately after the contract was breached, the plaintiff’s average sales were $800,000 per month.

6. Your analysis of the plaintiff’s average variable costs for operating expenses is 70 percent fixed and 30 percent variable.

Required: As the defendant’s expert witness:

a. What is your best estimate of the damages that the plaintiff has suffered as a result of your client’s breach of contract?

b. Based on the information provided, does the plaintiff’s lost profits and added costs” allegation have any basis in fact? Show necessary calculations to support your position.

c. If asked to provide the court with a “theoretical model” of the basis of you damages, what would you provide?

d. What additional information, if any, might you like to have to refine your damage estimates a bit more?

Answer 1

Solution:
Claim of damage	30,00,000		This included added cost and lost profit
As the contract was breached after 6 months so we have to estimate the losses for next 2.5 years only
as the entire contract was for 3 years
Plaintiff average sale per year			1,00,00,000
Total estimated sale for next 2.5 years			2,50,00,000
Estimated net profit on sale for next 2.5 years @ 10 %			25,00,000
Purchase in the first 6 months of contract			1200000
Estimated purchase of next 2.5 years			3000000
As the client was supplying the wood at 8 % below the market price so if the plaintiff will have to
buy it from open market, it will cost higher as below for the same quantity
3000000/ 92%	=	3260870
Additional cost		260870	(3260870-3000000)
a. My client was only supplying wood to plaintiff which they had to buy it from open market at higher rate and hence the
extra cost they would have is only 260870 which is the best damage claim
b . There is no question of damage because of lost profit as my client was not affecting their sale or other cost. This is based on all above
calculations
c. I will provide below as this is the only additional cost plaintiff had to incur
	As the client was supplying the wood at 8 % below the market price so if the plaintiff will have to
	buy it from open market, it will cost higher as below for the same quantity
	3000000/ 92%	=	3260870
	Additional cost		260870
d. The additional information that might be required could be as below:
	1. if the breach of contract caused any discontinuation of business of plaintiff to claim lost of profit
	2. actual procurement cost of hardwood from alternate supplier