Economic Experts (EE) provides economic consulting and litigation support in complex legal cases. One of EEs current
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At the time it was building the ForeignCO plant, USClient had several other construction projects. As part of USClient’s normal accounting practice, it allocates all overhead costs not incurred directly on particular projects to all projects, using total direct costs as the allocation base. Using this allocation methodology, the total overhead costs allocated to the ForeignCO project totaled $ 50 million.
ForeignCO hired an expert who wrote a report rejecting the $ 50 million of overhead as damages. Specifically, the expert for ForeignCO argued: “
Costs included as damages must be incremental to the contract in order to be damages. As such, those costs must be directly related and necessary to the activities caused by the breach and reflect expenditures that would not have been made but for the breach. Based on my review of USClient’s overhead, it is my opinion that the $ 50 million of overhead claimed as damages by USClient are either unrelated to the ForeignCo project or are fixed in nature and needed for the general operations of USClient. The $ 50 million of overhead costs would have been incurred by USClient and are not incremental to the ForeignCO project. Therefore, the damages claimed by USClient of $ 50 million of fixed overhead should not be included as damages.”
EE has been engaged by USClient to provide an expert witness to comment on ForeignCO’s ex-pert report cited above. You have been hired by EE as the expert witness to rebut ForeignCO’s opinion. The legal definition of damages that should be applied in this case is, “damages resulting from a breach of contract by a defendant are to be calculated under the principle that compensation awarded to the plaintiff as damages should place the plaintiff in a position economically equivalent to the plaintiff’s position had the harmful event never occurred.” 5 Required: Write a rebuttal report that critiques the ForeignCO expert witness. In other words, do you agree with ForeignCO’s expert that the $ 50 million of fixed overhead should be excluded as damages claimed by USClient? If you disagree, explain why the ForeignCO expert’s opinion is wrong. Note: for purposes of your report you should assume that the $ 50 million of overhead consists of allocated fixed indirect charges such as the salaries of the senior executives ( CEO, CFO, etc.), the human resource department, accounting, information technology, depreciation on the corporate office, and so forth.
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Related Book For
Accounting for Decision Making and Control
ISBN: 978-0078025747
8th edition
Authors: Jerold Zimmerman
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