Page 61 - Intellectual Property Disputes

In the Kalman v. Berlyn Corp. patent case, the Federal Circuit held that labor costs were fixed costs
because no additional labor expense would have been required to produce the infringing devices. fn 128 In
other circumstances, certain expenses included in "overhead" may be incremental and properly
deductible in arriving at incremental profits. For example, fringe benefits may be a type of overhead cost
to be deducted in calculating incremental profits. The facts of each case will dictate the nature of the
costs associated with producing the infringing product.

Fixed Costs

Fixed costs remain constant in total dollar amount as the level of sales activity changes. fn 129 These costs
typically do not respond to changes in the volume of sales activity within (a) a set period of time or (b) a
set production level. Examples of fixed-cost items may include factory and manufacturing equipment
and buildings, property taxes and certain insurance, charitable contributions, research and development,
and depreciation.

Capacity is often an important issue when evaluating fixed costs. If a company has excess capacity, it
may well have been able to produce and sell the infringed units with little, if any, additional fixed costs.
Conversely, if the company is operating at or close to full capacity, then additional units of production
may require additional investments in equipment or other typically fixed costs.

Variable Costs

Variable costs are those that change in direct proportion to changes in volume of activity. A variable
cost is one in which the per-unit cost remains relatively constant as volume changes. fn 130 In other
words, total variable costs vary as the level of unit sales changes. Although, in theory, variable costs are
relatively constant as volume changes, this is not always true in economic reality. The expert should
closely examine variable costs that may increase or decrease as volume changes, depending upon the
facts and circumstances of the case.

Direct materials and direct labor costs are usually variable costs because the total of these expenses
varies directly with the number of units produced. In addition, sales commissions may vary with total
sales and, therefore, are typically variable. Other variable costs may include factory overhead items such
as utilities and production supplies. Total variable costs change in direct proportion to changes in
production volume, which equates to zero dollars when the activity level is zero.

Semi-Variable Costs or Mixed Costs

A number of costs have both fixed and variable characteristics. fn 131 Semi-variable or mixed costs are
expenses that can be separated into fixed and variable components. The variable component increases or
decreases with sales or production volume, whereas the fixed component does not vary. For example,
sales personnel may be paid both a base salary and a commission based on sales. Although the base

fn 128 Kalman v. Berlyn Corp., 914 F.2d 1473 (Fed. Cir. 1990).

fn 129 P.E. Fess and C.S. Warren, Accounting Principles, 16th ed. (Cincinnati, OH: South-Western Publishing Co., 1990), 810.

fn 130 J. Gray and D. Ricketts, Cost and Managerial Accounting (New York: McGraw-Hill Book Co., 1983), 28.

fn 131 P.E. Fess and C.S. Warren, Accounting Principles, 16th ed. (Cincinnati, OH: South-Western Publishing Co., 1990), 810.

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