Saint Thomas University

Module 4 Assignment

Chapter 10
3. What is a tort?

A tort is an injury or wrongful act done with or without force against another person or his

property. It is an act that is harmful. It is a civil wrong that is a violation of a legal duty owed by

the person who commits the tort to the victim of the tort. The law definition of tort is “a civil

wrong or wrongful act, whether intentional or accidental, from which injury occurs to another.

Torts include all negligence cases as well as intentional wrongs which result in harm” (Law.com,

Retrieved 2020). Commonly speaking, it is when one person or entity inflicts damage against

another in which the injured party can sue for damages. A tort can lead to economic loss. Most

common cases usually include personal injury, wrongful death, and financial losses. “In personal

injury cases and wrongful death, damages assessment is somewhat straightforward. In

commercial damages cases, expert testimony is most often complex and driven by unique

circumstances” (Crumbley, Smith, & Heitger, 2017).

References:

Crumbley, D. L., Fenton, J. E. D., Smith, G. S., & Heitger, L. E. (2017). Forensic and

investigative accounting (8th ed.). Chicago, IL: Wolters Kluwer.

Legal Dictionary - Law.com. (n.d.). Retrieved April 2, 2020, from

https://dictionary.law.com/Default.aspx?selected=2137
6. Describe the two major theories used by the courts to determine damages.

There are two major theories employed to establish damages. The selection depends on state

laws.

Out-of-pocket method:

The term out-of-pocket means without funds or assets. An out-pocket loss is defined by the

difference between the amount of what the consumer gave and the market value of what was

obtained in return. It is usually use in breach of contract cases to calculate restitution damages.

“In other words, the damages award includes no opportunity costs in certain jurisdictions. The

plaintiff can recover nothing beyond his or her investment. In New York, a plaintiff may be

awarded only out-of-pocket damages rather than expectation damages” (Crumbley, Smith, &

Heitger, 2017).

-Benefit-of-the-bargain method:

Under the benefit-of-the-bargain theory the damages are an outgrowth of the initial contract, the

damages include not only the provided capital but any other extra cost like interest expense, lost

profits, and decreased value of the asset. “This method of recovery seeks to put an injured

plaintiff in the position he would have been in had his/her expectancy ensued” (US Legal Inc,

Retrieved 2020). Calculation involves at least five major factors: Method; Damage period;

Definition of profit; Growth rate; Discount rate.

The difference between both theories is that “under the benefit-of-the-bargain measure, the

defrauded party recovers the difference between the value he or she would have received had the

defendant’s false representation been true and the actual value received. Under the out-of-pocket
measure, on the other hand, the defrauded party recovers the difference between the value he or

she has paid (the purchase price or other consideration, for example) and the actual value

received” (Agiz & Dayal, 2016)

References:

Agiz, T., & Dayal, V. (2016, March 1). Benefit-of-the-bargain vs. out-of-pocket. Retrieved April

2, 2020, from https://mbafcpa.com/advisories/benefitofthebargain-vs-outofpocket/

Crumbley, D. L., Fenton, J. E. D., Smith, G. S., & Heitger, L. E. (2017). Forensic and

investigative accounting (8th ed.). Chicago, IL: Wolters Kluwer.

US Legal, Inc. (n.d.). Benefit-of-the Bargain Damages Law and Legal Definition. Retrieved

April 2, 2020, from https://definitions.uslegal.com/b/benefit-of-the-bargain-damages/

7. Sam contracts to buy an asset from Pam for $205,000, but six months later Pam says no to the

sale. The asset is now worth $325,000. What would the damages be under the benefit-of-bargain

rule?

Sam and Pam are under an agreement for Sam to buy an asset from Pam for $205,000. After six

months Pam declares no to the sale. The value of asset now is $325,000. Under the benefit-of-

the-bargain theory the damages include not only the money invested but also other expenses, lost

profits, and decreased value of the investment.

The amount of damages would be the difference between the initial value of the amount agreed

to sale and the value as of now.

325,000 – 205,000=120,000
8. What five major factors are required for the benefit of-the-bargain computation?

The five major factors that are required for the benefit-of-the bargain computations are:

a) Method

b) Damage period

c) Definition of profit

d) Growth rate

e) Discount rate

References:

Crumbley, D. L., Fenton, J. E. D., Smith, G. S., & Heitger, L. E. (2017). Forensic and

investigative accounting (8th ed.). Chicago, IL: Wolters Kluwer.

9. Describe the four major ways to calculate lost profits.

The four major ways to calculate lost profits are:

 Before and after method, take sales or sales growth before the act and compare to the

comparable figures afterward. The theory is that the business would have stayed with the

same level of revenues and profits after the event as it did before that event. Other factors

that can affect the level of revenues are also justified, such as the possible future

repercussions of the courses in revenue in place before the event.

 Yardstick (or benchmark) approach. “Under this approach, the expert utilizes a

“yardstick” to estimate what the revenues and profits of the affected business would have

been. Examples of potential yardsticks that could be used include comparing the revenue

trends and results of the business to a similar business; comparing to other unharmed
 locations of the business; utilizing the actual experience versus budgeted results or

industry averages” (Serrano, 2017).

 But-for” method. It is based on a forecast of post-incident transactions based on what

should have occurred during the time of loss, which shows how the damage is affecting

the business and what should have occurred against what actually happened.

 Direct method. Any agreement may indicate how to calculate lost profits. In some

situations, the expert can refer to a specific agreement that may set the terms that define

forecasted revenue levels.

 Combination method. May use a combination of methods.

References:

Crumbley, D. L., Fenton, J. E. D., Smith, G. S., & Heitger, L. E. (2017). Forensic and

investigative accounting (8th ed.). Chicago, IL: Wolters Kluwer.

Ferraro, S. L. (2017, June 21). Calculating Lost Profits - Commercial Damages. Retrieved April

2, 2020, from https://fazcpas.com/calculating-lost-profits-commercial-damages/

Nguyen, J., Monaghan, C., Pastrana, M., & LaBrosse, V. (2015, August 29). How to Accurately

Assess Damages in Litigation. Retrieved April 2, 2020, from

http://www.legalinkmagazine.com/2015/08/how-to-accurately-assess-damages-in-litigation/

17. What are the most commonly used cost behavior patterns in forensic analysis? Define and

describe these cost behavior patterns.

The three basic cost behavior patterns are variable, fixed, and mixed in estimating damages in

forensic analysis. “All damages calculations performed by accounting experts requires the use of

cost behavior concepts and the estimation of cost behavior patterns for relevant accounting
data in the dispute” (Crumbley, Smith, & Heitger, 2017). The idea of cost behavior is one of

the most important concepts in forensic analysis. Determining how a cost will behave is

essential. If any concept is not considered or is used incorrectly, it may lead to the wrong

calculation of damages.

Fixed Cost: It is a cost that a company or person must paid regardless the volume of production

or services. It does not change in overall for a given time period despite broad variations in

output or volume of activity

Variable Costs: Variable costs are those costs that vary in total amount directly and

proportionately with the output.

Mixed Costs: It share characteristics with fixed and variable costs. A partial amount does not

vary, and the other part does.

“Fixed costs are typically not deductible to arrive at lost profits. Only those direct expenses

that would have been paid to generate the sales qualify as avoided expenses. Avoided costs are

also commonly referred to as variable costs, meaning that when sales increase these expenses

increase and vice versa. In this article we discuss how to identify avoided costs” (Morones,

Murphy, Prager, Heidt & Niculita, 2019)

References:

Codjia, M. (2019, February 11). The Importance of Budgetary Control in Management

Accounting. Retrieved April 2, 2020, from https://bizfluent.com/facts-6750338-importance-

budgetary-control-management-accounting.html

Crumbley, D. L., Fenton, J. E. D., Smith, G. S., & Heitger, L. E. (2017). Forensic and

investigative accounting (8th ed.). Chicago, IL: Wolters Kluwer.

Morones, S., Murphy, J., Prager, J., Heidt, P., & Niculita, A. (2019, August 28). Forensic

Accounting: Lost Profits Analysis Pt. 2-Avoided Costs. Retrieved April 2, 2020, from

https://moronesanalytics.com/avoided-costs/

26. Mr. Snow has worked for the Jones Auto Parts Store for 12 years. He started as a salesclerk

and worked his way up to assistant store manager. 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 store 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 his damages 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 follows.

Mr. Snow’s salary grew at an average annual rate of 9.11 percent. This rate was calculated by

dividing his final year 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. He then divided by 12 years to

get an average annual increase of 9.11 percent (109.375 ÷ 12) = 9.11 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.
First, the expert report filed on Mr. Snow’s behalf has assumed that the increase salary rate is

9.11 % per annum. The idea here is inaccurate because businesses can stop increasing salary at

any time if they are not growing as expected. Anything can happen that might decrease the

growth rate. The assumption of a constant salary increase is incorrect. Also, when calculating

the total claim amount using the explanation that the expert provided, there is a difference.

Please see Table 1.1. This difference could a calculation error.

Total claim = $2,250,737 Total re-calculation=$1,893,240 Difference= $357,496

Expected
Growth factor as Growth factor salary as per
Year
per expert as per expert Mr. Snow's
expert
0 $ 33,500.00
1 (1+0.0911)^1 1.09 36,551.85
2 (1+0.0911)^2 1.19 39,881.72
3 (1+0.0911)^3 1.30 43,514.95
4 (1+0.0911)^4 1.42 47,479.16
5 (1+0.0911)^5 1.55 51,804.51
6 (1+0.0911)^6 1.69 56,523.90
7 (1+0.0911)^7 1.84 61,673.23
8 (1+0.0911)^8 2.01 67,291.66
9 (1+0.0911)^9 2.19 73,421.93
10 (1+0.0911)^10 2.39 80,110.67
11 (1+0.0911)^11 2.61 87,408.75
12 (1+0.0911)^12 2.85 95,371.69
13 (1+0.0911)^13 3.11 104,060.05
14 (1+0.0911)^14 3.39 113,539.92
15 (1+0.0911)^15 3.70 123,883.41
16 (1+0.0911)^16 4.03 135,169.19
17 (1+0.0911)^17 4.40 147,483.10
18 (1+0.0911)^18 4.80 160,918.81
19 (1+0.0911)^19 5.24 175,578.51
20 (1+0.0911)^20 5.72 191,573.72
Total $ 1,893,240.7

Table 1.1-Calculation of expected salary following instructions of expert report filed on Mr.

Snow’s behalf.

The second incorrect assumption is the growth rate of 9.11 percent. Mr. Snow’s first salary was

$16,000, and right before getting promoted, he was earning $21,400. Then he was promoted to

Assistant Store Manager, and his salary increased to $25,000. The unusual rise from 21,400 to

25,000 due to the promotion should not be considered as part of determining his average
annual salary increment. Then by the time he was fired, he was making $33,500 yearly. Then

to calculate the growth rate the periods need to be separate in two as follow:

Six Years as Store Clerk Six Years as Assistant Store Manager

Initial Salary 16,000 Initial Salary 25,000
Before promotion 21,400 Final Salary 33,500
Total Percentage 33.75% Total Percentage 34.00%
Percentage by year 5.63% Percentage by year 5.67%

Average Growth Rate: 5.65%

Consequently, it is wrong to assume an increase of 9.11% as it is evident by the above

calculation that the average growth rate is only 5.65% per annum.

The claim should be roughly calculated as below table 1.2:

Growth factor as Growth factor Expected

Year
per expert as per expert salary
0 $ 33,500.00
1 (1+0.0565)^1 1.06 35,392.75
2 (1+0.0565)^2 1.12 37,392.44
3 (1+0.0565)^3 1.18 39,505.11
4 (1+0.0565)^4 1.25 41,737.15
5 (1+0.0565)^5 1.32 44,095.30
6 (1+0.0565)^6 1.39 46,586.69
7 (1+0.0565)^7 1.47 49,218.83
8 (1+0.0565)^8 1.55 51,999.70
9 (1+0.0565)^9 1.64 54,937.68
10 (1+0.0565)^10 1.73 58,041.66
11 (1+0.0565)^11 1.83 61,321.01
12 (1+0.0565)^12 1.93 64,785.65
13 (1+0.0565)^13 2.04 68,446.04
14 (1+0.0565)^14 2.16 72,313.24
15 (1+0.0565)^15 2.28 76,398.94
16 (1+0.0565)^16 2.41 80,715.48
17 (1+0.0565)^17 2.55 85,275.90
18 (1+0.0565)^18 2.69 90,093.99
19 (1+0.0565)^19 2.84 95,184.30
20 (1+0.0565)^20 3.00 100,562.22
Total $ 1,254,004.1

Table 1.2: Total Claim based on Growth Rate 5.65%

31. 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.

3. 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?

 The best estimate of the damages that the plaintiff has suffered is $480,000. My client has

influenced only the increase in the Hardwood Lumber supplies and the decrease in the net

profit due to the first one.

Gross Margin on Sale 35% Expected Sales as history trend 30,000,000

Profit on sales 10% Actual Sales after contract was breached 29,000,000
Average Sales per Year 10,000,000 Unfavorable $ 1,000,000
Average Sales per Month 833,333
After the 6 months 800,000
Fixed Costs 70% Net Profit-Expected 3,000,000
Variable Costs 30% Net Profit-Actual 2,900,000
Unfavorable $ 100,000

Hardwood Lumber - Contract Rate 1,200,000 Gross Margin Expected 10,500,000

Hardwood Lumber - Market Rate 1,296,000 Gross Margin Actual 10,150,000
Unfavorable $ 480,000 Unfavorable $ 350,000

Operating Expenses - Expected 7,500,000

Total damages $ 480,000 Operating Expenses - Actual 7,250,000
Favorable $ 250,000

Fixed Expenses - Expected 5,250,000

Fixed Expenses - Actual 5,075,000
Favorable $ 175,000

Variable Expenses-Expected 2,250,000

Variable Expenses - Actual 2,175,000
Favorable $ 75,000

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.

My client did not interfere with the sales of the plaintiff’s, the calculations above show the

variances of net profit and sales, however the allegation of lost profits has not basis since my

client was not affecting them. He only affected the extra costs of the supplies.
c. If asked to provide the court with a “theoretical model” of the basis of your damages, what

would you provide?

The client was providing wood at 8% below the market rate. The plaintiff will have to but their

wood supplies from the open market with a higher cost for the same quantity. Therefore, the

additional costs that the plaintiff will have to incurred for the next two year and a half are as

follow:

Hardwood Lumber - Contract Rate 1,200,000

Hardwood Lumber - Market Rate 1,296,000
Additional Costs $ 480,000

d. What additional information, if any, might you like to have to refine your damage

estimates a bit more?

I will consider any interruption of business that the plaintiff might have suffered because of the

breach of contract. Also, I will request the reason for the decrease of sale. “In a breach of

contract action, a plaintiff may recover the amount of damages that are required to place him in

the same position he would have occupied had the breach not occurred” (Griffiths Law PC,

Retrieved 2020).

References:

Griffiths Law PC. (n.d.). 4 Elements of a Breach of Contract Claim (and more). Retrieved

April 4, 2020, from https://www.griffithslawpc.com/resources/elements-of-a-breach-of-

contract-claim/
Chapter 12

3. Since typically both the plaintiff’s and the defendant’s experts start their estimation of

damages with the plaintiff’s actual wages data, how can they come to different conclusions

about the amounts of wage loss damages?

Experts may have different opinions on what it is relevant and what is not. They will base the

economic damages model on those issues they considered. Even though, they can start with the

same components they might end up with different amounts. The method of calculation and

interpretation may vary among them. “Sometimes the differences between contending experts

rest on the measurements of the amounts that should be reported as damages and sometimes

experts disagree on what are the relevant assumptions that must be made to determine

appropriate measures of damages. Questions about what should be included in the economic

damages model and what amounts should be reported for each damage component rest in part

on the expert's understanding of the nature and character of the circumstances and events that

transpired in connection with the case. The expert must then convert this knowledge into an

accurate and understandable measurement of the economic damages arising from the case

issues” (Crumbley, Smith, & Heitger, 2017).

References:

Crumbley, D. L., Fenton, J. E. D., Smith, G. S., & Heitger, L. E. (2017). Forensic and

investigative accounting (8th ed.). Chicago, IL: Wolters Kluwer.

4. What are commonly used components when measuring economic damages in a wrongful

discharge case? Describe each component and explain why it should be used in the damage

calculation.

-Lost wages: This consist of all earnings that would have been compensated to the employee. It

can include all kind of direct and indirect compensation like salary, pay supplement, bonuses,

reimbursed expenses. This is applied in the calculation because it is what the employee is

immediately out - on a wrongful basis

-FICA (Payments that would have been paid on lost salary): Tax payments that the employer

would have paid on behalf of the employee, and is included because it is the tax portion of the

lost wages

-Health insurance: Includes all employee health and medical benefits, and other employee

benefits, and is included because it is considered and treated in the same way as a lost wage by

the courts in a wrongful discharge case.

6. Should fringe benefits be used in the computation of economic damages in a wrongful

discharge case? Why or why not?

Yes. Fringe benefits are non-wage compensations in addition to an employee’s wages, like

health insurance, life insurance, retirement plane, etc. It is a valuable benefit that an employee

receives. Fringe benefits should be considered in the computation of economic damages in a

wrongful discharge case because in wrongful discharge cases the employee will be deprived of

this benefit.

“The objective of an analysis of lost compensation is to determine, within reasonable economic

certainty, the accurate value of wages and fringe benefits that someone would have likely
earned and received but-for a disruptive incident. A reasonable estimate of an individual's lost

wages and fringe benefits has to be based on the likelihood that such earnings would in fact

have occurred” (Tranfa-Abboud, 2012)

Excluding fringe benefits from the computation of damages would substantially understate the

damages suffered by a plaintiff in a wrongful discharge case.

References:

Transfa-Abboud, J. V. (2012, March). Compensatory Damages in Lost Wages Claims: The

Relevance of Unemployment Trends Adjustments. Retrieved April 3, 2020, from

https://www.markspaneth.com/insights/service/service/compensatory-damages-in-lost-wages-

claims-the-relevance-of-unemployment-tre

8. What are some of the commonly used resources that experts use in evaluating a personal

injury case and in computing economic damages?

There are many of resources that experts utilize in evaluating a personal injury case and in

computing economic damages.

There are plenty of articles, books and websites related to the fundamental concepts of personal

damage cases. Information regarding personal injury developed by the American Bar

Association (ABA) intended to help the general public understand personal injury law and

litigation. U.S. government websites like the U.S. Labor Department, Bureau of Labor

Statistics. They can use similar cases information. Some of the book are Determining

Economic Damages by Gerald D. Martin and Ted Vavoulis and Economic/ Hedonic Damages:

The Practice Book for Plaintiff and Defense Attorneys by Brookshire and Smith.
References:

Crumbley, D. L., Fenton, J. E. D., Smith, G. S., & Heitger, L. E. (2017). Forensic and

investigative accounting (8th ed.). Chicago, IL: Wolters Kluwer.

13. What, if anything, would be different in evaluating the economic damages between a case

in which an employee was permanently disabled in a job-related accident and a case in which

an employee was killed in a job-related accident?

Mostly the same statistical data is used in evaluating the economic damages between a case in

which an employee was permanently disabled in a job-related accident and a case in which an

employee was killed in a job-related. There is a small difference in the data used. The

calculation of a permanently disabled job-related needs more examination of estimates. In

wrongful death cases, there is no need to determine the extent of disability in computing wage-

related damaged or the value of the lost household services, but such analysis is needed in

disability

15. What are the components of measuring the economic damages from the loss of household

services?

Factor that influence the measurement of economic damages from the loss of household

services are:

-the number of hours of household services that were normally provided by the accident

victim, -the amount of household services that have been lost because of the accident

-the dollar value of those lost services

 “The categories usually related to calculating household services are Household Production

and Caring and Helping, which consist of these sub-categories:

Household Production:

 Inside Housework
 Food Cooking & Clean-up
 Pets, Home & Vehicles
 Household Management
 Shopping
 Obtaining Services
 Travel for Household Activity
Caring and Helping:

 Household Children
 Household Adults
 Non-Household Members
 Travel for Household Members
 Travel for Non-Household Members

If the plaintiff claims damages for lost household services, questions should be asked about

specific tasks the plaintiff performed pre-event and post-event, rather than a broader category

of services” (Piper, 2020).

References:

Crumbley, D. L., Fenton, J. E. D., Smith, G. S., & Heitger, L. E. (2017). Forensic and

investigative accounting (8th ed.). Chicago, IL: Wolters Kluwer.

Piper, B. (2020, February 14). Establishing Damages for Lost Household Services. Retrieved

April 3, 2020, from https://www.rpcconsulting.com/establishing-damages-for-lost-household-

services/
20. What is meant by “job-related costs?” What are some common components of job-related

costs?

Job-related costs are expenses that employees incur as a result of their work. Some examples

are the costs of driving to work, clothing, or any other costs. These costs are subtracted from

the gross economic loss because it can be assumed that they have saved money on work-related

costs.

References:

Gottlieb, M. S. (2014, October 9). Calculating Economic Damages. Retrieved April 3, 2020,

from https://www.msgcpa.com/forensicperspectives/calculating-economic-damages/

22. What is meant by “mitigation” of damages with respect to lost wages?

When an employee file a suit, alleging "wrongful discharge" from a job, the court evaluates the

circumstances to decide if the employer is liable. If an employee is wrongfully discharged,

most states do not consider the event as a lifetime event. "Many states require that a person

who has been wrongfully discharged must seek other employment to "mitigate" the amount of

damages caused by the wrongful discharge. If there is an available market for the type and

quality of the fired employee, he or she must seek such employment. Thus, the damages would

be limited to the difference between the wages and the benefits of the job at issue in the dispute

versus the wages and the benefits provided by the new job. If a person cannot find similar

employment, the issue of mitigated wage damages may be more complex. For example, if a

person has a unique job or a job with significant responsibility and income in a particular

geographic area, and there are no other similar jobs in that geographic area, the court may
determine that finding a similar job in the area is not possible and the wage mitigation

requirement will not stand. In this dispute, the defendant's expert included a salary mitigation

component"(Crumbley, Smith, & Heitger, 2017).

References:

Crumbley, D. L., Fenton, J. E. D., Smith, G. S., & Heitger, L. E. (2017). Forensic and

investigative accounting (8th ed.). Chicago, IL: Wolters Kluwer