Page 27 - Calculating Lost Profits

$1,500 incremental costs based on 1,500 units at $1 per unit). As a check, the practitioner then applied
the second methodology, determining that the but-for profit anticipated for the menu item during the 30-
day period was $3,000, and the actual profits related to the menu item were $0 — again concluding un-
discounted lost profits damages were $3,000.

In this relatively simple example, the two models were corroborative, and both models proved easy to
apply. Suppose, however, that the practitioner was concerned about potential mitigating sales of other
menu items. Although the practitioner could attempt to evaluate each menu item individually under the
first previously mentioned model, that model may prove burdensome when the wrongful act’s effects on
a plaintiff are more pervasive. Given the concerns, the practitioner also applied the second previously
mentioned model to the restaurant as a whole, calculating the but-for profits during the 30-day period to
be $35,500, and the actual profits during the 30-day period to be $33,500 — a difference of just $2,000,
rather than the $3,000 previously calculated. This discrepancy caused the practitioner to reevaluate the
completeness of the calculations of the incremental revenue and incremental costs under the initial
method, which uncovered an additional (mitigating) effect in the other products. In particular, upon in-
vestigation of the discrepancy between the calculations under the two methodologies, the practitioner
learned that although Franchisee indeed sold 1,500 fewer units of the popular menu item than anticipat-
ed, the actual profits during the 30-day period reflected mitigating profits from the sale of an alternative
menu item in excess of those estimated in the but-for profits, but also additional damages from the loss
of complementary drink sales and profits to customers who were lost as a result of the unavailable item.

It is possible that the effects on the plaintiff’s business may be confined to a particular product or a spe-
cific customer or location, as in the previous examples. Returning to the American Kitchen example,
suppose that Franchisee was unable to open a location in 2017. The lost profits could be confined to the
location’s profits that would have been earned but were not. Alternatively, suppose that Franchisee’s in-
ability to operate an additional location during 2017 also caused it to fail to qualify for certain volume-
based price reductions with suppliers. Under this circumstance, Franchisee’s damages would be equal to
its lost profits at the new location but also the lost profits at other American Kitchen locations. In this
context, a total-entity comparison of but-for profits and actual or mitigating profits would be appropri-
ate.

© 2020 Association of International Certified Professional Accountants 25