Problem 1 -
Mr. Snow has worked for the Jones auto parts store for 12 years. He started as a sales clerk. He was the assistant store manager for six years before he was fired by the owner after a heated argument. Mr. Snow started working at the store for $16,000 per year. Right before he was promoted to assistant manager, he was earning $21,400. His first year salary as assistant manager was $25,000, and he was earning $33,500 when he was fired. Mr. Snow was 45 years old at the time he was fired.
In this damage claim, Mr. Snow is seeking $2,250,737 in lost compensation. In the expert report filed on Mr. Snow's behalf, the expert explained his calculation of damages as follow. Mr. Snow's salary grew at an average annual rate of 9.11 percent. This rate was calculated by dividing his final salary of $33,500 by his first year salary of $16,000. The result showed an increase of $109.375 percent ($33,500/$16,000) = 2.09375 percent. Next, the expert projected a 9.11 percent salary increase compounded annually for Mr. Snow for the remaining 20 years that he expected to be employed by the Jones Auto parts Store. He then summed the expected annual salaries to arrive at the alleged damages amount.
You have been hired as an expert witness by Jones Auto Parts Store to provide rebuttal testimony to the expert hired by Mr. Snow. Without regard to the issue of liability in this case, critique the damages estimate of Mr. Snow's expert providing as much reasoning and support for your position as possible.
Problem 2 -
Assume you have been retained as an expert witness for a client who is defendant in this 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 he 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 of $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.
3. The plaintiff's average gross margin on sale 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 beached, 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 cost" allegation have any basis in fact? Show any calculations to support your position.
c. If asked to provide the court with a "theoretical model" of the basis your damages, what would you provide?
d. What additional information, if any, might you like to have to refine your damage estimates a bit more?