Page 53 - Calculating Lost Profits

Figure 7.7. Legal Expenses, Stores Open at Year-End, and New Stores by Year

Legal fees are higher in years in which new stores are launched. Whether this is simply spurious correla-
tion, or it is an incremental cost related to the addition of a store can be investigated by, for example, re-
viewing the invoices for legal fees or possibly speaking with management (or asking questions in a dep-
osition). It is also possible that certain legal fees may be covered by insurance. Again, these are issues
that likely call for investigation by the practitioner.

The question in a dispute context of which costs are incremental inherently depends on the issue in ques-
tion in the dispute and the particular facts of the case at hand. In the American Kitchen example, the
practitioner evaluated the issue of profits lost from the inability to add a restaurant location. In this con-
text, construction costs would likely be incremental. However, if the dispute pertained to the hours that
the location was able to be open (for example, a store is forced to close at 8 p.m., and the owner believes
he or she is entitled to keep it open until 10 p.m.), construction costs likely would not be incremental.
Neither would marketing expense likely be incremental in a dispute about adding hours during which
the restaurant could remain open. In contrast, if there was a disputed event that caused all of Franchisee's
restaurants chain to close (for example, revocation by Franchisor of all franchise rights), then many
more costs could become incremental, potentially including all executive compensation, as an example.
The following is a table that summarizes how cost sample line items may be incremental or fixed, de-
pending on the scope of the analysis or dispute.

The analysis of incremental expenses is far from straightforward, and it does not lend itself well to a
checklist, given the variety of issues and considerations in play. As a result, the categorization and char-
acterizations in the following table are examples of possible characterizations. As has been described at
length, the treatment of costs as incremental or fixed requires judgment and analysis, with conclusions,
depending on the facts and circumstances at issue in the case.

© 2020 Association of International Certified Professional Accountants 51