Opinion ID: 488109
Heading Depth: 3
Heading Rank: 2

Heading: Profit Margin.

Text: 46 Godfather's argues that Universal's accountant failed to subtract three items of overhead in computing its profit margin: warehouse expense, depreciation on the deep dish equipment, and salary increases resulting from the increased sales. Godfather's maintains that these costs were directly attributable to Universal's production of the deep dish supplies, and if accounted for, would reduce Universal's profit margin to 9.97%, as testified to by Godfather's accountant. 47 Because this is a sale of goods case, lost profits are governed by Missouri's version of U.C.C. Sec. 2-708: 48 (2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead ) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this article (section 400.2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale. 49 Mo.Ann.Stat. Sec. 400.2-708(2) (Vernon 1965) (emphasis added). 50 The Missouri Court of Appeals recently interpreted the reasonable overhead language of section 400.2-708(2) as including fixed overhead costs but not variable overhead costs. Scullin Steel Co. v. Paccar, Inc., 708 S.W.2d 756, 763 (Mo.App.1986) (citing Teradyne, Inc. v. Teledyne Industries, Inc., 676 F.2d 865, 869-70 (1st Cir.1982)). Fixed overhead costs are those costs incurred regardless of the volume of output, such as rent, taxes and administrative salaries. Great Western Sugar Co. v. Mrs. Allison's Cookie Co., 563 F.Supp. 430, 433 (E.D.Mo.1983). Variable overhead costs, also called direct costs, consist of those expenses directly tied to the volume of output, and these costs must be subtracted from the lost profit calculation under section 400.2-708(2). Id. at 434; accord Automated Medical Laboratories, Inc. v. Armour Pharmaceutical Co., 629 F.2d 1118, 1125-26 (5th Cir.1980). 51 In calculating the lost profit margin of 31.4%, Universal's accountant testified that he subtracted all variable overhead, or direct costs involved in producing the product from the sales price. Upon cross-examination, he testified that he did not subtract the three disputed items of overhead because he felt they were not costs involved in producing the product. As to the warehouse expense, he stated that it was recorded in Universal's books as rent, and further noted that Universal's products were manufactured outside and shipped direct to the customer, although he did admit having seen some pans stacked in the warehouse. He also testified that he subtracted out certain labor costs as direct costs attributable to the product, but did not subtract out the increase in salaries of Universal principals Rutledge and Power. Godfather's accountant, although testifying to his profit margin calculation of 9.97%, did not testify specifically as to any of the three disputed items of overhead. 52 Keeping in mind our standard of review, we believe that substantial evidence supports the inclusion of the three disputed expenses in the lost profit calculation as amounts of reasonable overhead, and thus, that the evidence supports that part of the jury's verdict based on the 31.4% profit margin. First, generally accepted accounting principles permit depreciation to be classified as a fixed overhead cost, see C. Horngren, Cost Accounting--A Managerial Emphasis 27-28 (4th ed. 1977), because this expense is not tied to the volume of a producer's output. Thus, despite the fact that Universal purchased new equipment for the Godfather's contract, it is clear that depreciation on this equipment need not have been subtracted in Universal's lost profit calculation. Second, if the jury believed the testimony of Universal's accountant regarding warehouse expense, then it could have determined that the expense was either rent, or a cost not tied to the volume of Universal's output. Under either scenario, the jury could have concluded that Universal's warehouse expense was a fixed overhead cost. Finally, although it is generally true that salaries in a sales organization increase as sales increase, the specific testimony regarding increased salaries concerned only Universal's principals, who are executives of the company. It is well-settled under accounting principles, however, that administrative or executive salaries are fixed overhead costs. Id. at 22; see Great Western, 563 F.Supp. at 433. Therefore, because substantial evidence, viewed in the light most favorable to Universal and in view of the applicable law, supports classification of all three items as fixed overhead costs, we believe the evidence amply supports that part of the jury's verdict based on the 31.4% profit margin. 53