Page 48 - Acertaining Economic Damages Calculation

Use of Account Analysis and Regression to Identify the Fixed or Variable Nature of Costs

In assessing the nature of costs as fixed or variable and whether these have been avoided for purposes of
a lost profits analysis, the practitioner may rely upon multiple sources of information. For example,
company employees may have insight into the specific classifications of costs relevant to the product or
business line at issue, whereas public sources discussing typical costs within an industry may also be
available. These sources are often combined by the practitioner with two common methods for assessing
the nature of costs: account analysis and regression analysis, fn 50 both discussed in the AICPA Forensic
and Valuation Services practice aid, Calculating Lost Profits. fn 51

At a high level, when using the account analysis methodology, the practitioner typically reviews in de-
tail a company’s profit and loss statements, general ledgers, and chart of accounts, ascertaining the func-
tion of the account and costs relevant to the particular loss at issue. When using account analysis, the
practitioner should be mindful of categories of costs that may be semi-variable because the cost account
itself typically does not distinguish between such semi-variable costs and variable costs.

Regression analysis is a statistical method for estimating fixed and variable costs using historical cost in-
formation as the dependent variable, whereas revenue or volume may be selected as the independent
variable(s). fn 52 Thus, regression analysis seeks to use historical values of the independent variable(s) in
order to derive expected values for the dependent variable (costs in this example) in the but-for world.

The cases discussed in this section provide insight into how a court addressed competing methodologies
and analyses to estimate avoided costs under the specific facts of the case at hand.

eCommerce Indus., Inc. v. MWA Intelligence, Inc., 2013 WL 5621678 (Del. Ch. Sep. 30, 2013) (un-
published)

Subsidiaries of eCommerce Industries (eCommerce), OMD Corporation (OMD), and La Crosse Man-
agement Systems, Inc. (La Crosse) (collectively ECI Parties) entered into an exclusive marketing, li-
cense, and distribution agreement with MWA Intelligence, Inc. (MWA) related to the ECI Parties’ back-
end software system products to pair with MWA’s front-end software product in the market. fn 53 At the
time, La Crosse and OMD also offered front-end software products that competed with MWA’s offer-
ing. However, under the license agreement entered into by the parties, MWA was not required to sell the
ECI Parties’ front-end products. Subsequently, eCommerce purchased DGI Management Systems, Inc.

fn 50 It should be noted that other alternative methodologies for assessing the nature of costs exist, although they are not discussed
here.
fn 51 For additional information, see the AICPA Forensics and Valuation Services practice aid, Calculating Lost Profits.

fn 52 It is up to the practitioner to select the appropriate independent variable to use under the facts and circumstances of the matter at
hand. Multiple independent variables may be appropriate in the regression analysis performed by the practitioner, as discussed in the
AICPA Forensics and Valuation Services practice aid, Calculating Lost Profits.

fn 53 The relevant software products relate to the office equipment industry. Back-end software refers to enterprise resource planning
software that assists businesses with managing inventory, accounts receivable, and accounts payable. Front-end software contains
functionality that assists office equipment businesses with interacting with its end customers, including monitoring end customers’
machine usage, monitoring equipment malfunctions, and providing remote service functionality that assists technicians in the field.
Both front-end and back-end software products are typically required by an office equipment dealer to operate its business.

46 © 2020 Association of International Certified Professional Accountants