Opinion ID: 412712
Heading Depth: 1
Heading Rank: 3

Heading: disputed allocations of cost: is there a genuine issue

Text: 12 OF MATERIAL FACT? 13 Adhering to the precepts of Areeda-Turner analysis, the district court examined the accounting evidence submitted by the parties and compared Temple's revenues with its incurred costs in order to determine whether the fifteen-percent-off manager's special resulted in sales of textbooks below average variable cost. Total sales of the fifty titles included in the manager's special amounted to $118,427.85, with an invoice price of $108,012.40. Temple's gross margin was thus $10,415.45. The district court further reduced this margin to $6,720.70 by deducting several other expenditures that either were undisputed or were resolved in accordance with the figures offered by Sunshine: freight-in charges of $2,134.65; freight charges for returned books of $1,056.82; bad-check expenses of $355.28; and handbill printing costs of $148. 14 The dispute in this case focused on the payroll expenses and the amount--if any--that should be allocated for inventory shrinkage (i.e., theft). The district court determined that Temple's payroll expenses in connection with the sale were $3,787.97 but that the cost of theft should not be considered a variable cost. Subtracting $3,787.97 from $6,720.70, the court found that Temple had received a return of $2,932.73 above variable cost and therefore had not engaged in predatory pricing. Sunshine, however, argues that the manager's special cost Temple $7,839.19 in payroll expenses and that a 2.9 percent inventory-shrinkage charge (amounting to $3,434.41) also should have been included as a variable cost; acceptance of either or both of Sunshine's figures would reduce Temple's return below average variable cost--a result that Areeda-Turner analysis would consider predatory. Temple, for its part, presents a third set of figures: Temple agrees with the district court that inventory shrinkage is not a variable cost but asserts that the court overstated the payroll expenses by $902.97. Temple therefore claims to have earned a return above average variable cost even more significant than that found by the district court. 15 Sunshine and Temple employ different accounting methods to produce their respective results. Sunshine seeks to ascribe wages and salaries to the one-week manager's special by allocating payroll expenses in proportion to sales: if X% of Bookstore sales during the allocable period were Manager's Special sales, X% of Bookstore payroll should be borne by those revenues. Brief for Appellant at 17. This approach may be termed a sales-based allocation. Temple, by contrast, argues for a unit-based, or per-volume, approach, which involves dividing the Bookstore's textbook-related payroll costs for approximately two months prior to the sale among each volume ordered, priced, and shelved during that period; Temple then multiplies the per-volume figure by the number of volumes sold during the manager's special. The district court accepted Temple's approach, though it adjusted Temple's figures by increasing the amount of the store manager's labor allocable to the sale and by including payroll cost attributable to books returned as unsold after the one-week manager's special.The question of inventory shrinkage presents additional accounting problems. Temple estimated its revenues by calculating how many of the books it had ordered no longer remained in inventory. This method assumes that revenues were generated by all books no longer in stock, but Temple could not demonstrate that each of those books actually had been sold, rather than mislaid or stolen. Sunshine therefore contends that basic accounting principles require some kind of adjustment (Sunshine suggests $3,434.41) to average variable cost for inventory shrinkage and that revenues should be reduced to account for books that merely vanished. Inventory shrinkage cannot be considered a fixed cost, claims Sunshine, because no theft ever would occur were Temple to cease selling books (its output); moreover, Sunshine argues, fewer items in a store also means fewer things to steal. Brief of Appellant at 15. 12 16 Temple disputes Sunshine's argument and has submitted an affidavit of John P. Cassel, Jr., Temple's Director of Student Stores, stating: In 1974-75, $1,506,852 worth of textbooks were sold and there was shrinkage of 5.7%; in 1978-79, $1,791,193 worth of textbooks were sold and the shrinkage was 2.9%. Cassel Supp. Aff. at p 12. The court accepted this affidavit as conclusive evidence that increased sales do not necessarily generate increased theft and refused to factor inventory shrinkage into its calculations of variable cost. 17 In sum, Sunshine first asserts that payroll costs during the period of alleged predation must be divided in accordance with dollar sales of that period; Temple chooses to allocate such costs according to a per-volume, unit-based method. Second, Sunshine contends that inventory shrinkage, through theft or otherwise, must be considered in computing average variable cost; Temple argues that theft does not vary with sales and thus is not a variable cost. Acceptance of either or both of Sunshine's approaches (and figures) would have raised Temple's average variable costs above its prices. The trial court thus was faced with a two-fold dispute over how much it actually cost Temple to run the manager's special. 18 This Court recently has summarized the standards for summary judgment: 19 Rule 56 of the Federal Rules of Civil Procedure provides that a trial court may enter summary judgment if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. We have characterized summary judgment as  'a drastic remedy' , and have made clear that courts are to resolve any doubts as to the existence of genuine issues of fact against the moving parties. Ness v. Marshall, 660 F.2d 517 at 519 (3d Cir.1981) (quoting Tomalewski v. State Farm Life Insurance Co., 494 F.2d 882, 884 (3d Cir.1974)). Moreover, [i]nferences to be drawn from the underlying facts contained in the evidential sources submitted to the trial court must be viewed in the light most favorable to the party opposing the motion. Goodman v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir.1976), cert. denied, 429 U.S. 1038, 97 S.Ct. 732, 50 L.Ed.2d 748 (1977). On review the appellate court is required to apply the same test the district court should have utilized initially. Id. 20 Hollinger v. Wagner Mining Equipment Co., 667 F.2d 402, 405 (3d Cir.1981). 21 To support its contention that a sales-based allocation of payroll expenses is necessary, Sunshine cites Welsch & Anthony, Fundamentals of Financial Accounting 69 (3d ed. 1981), for the proposition that all costs ultimately must be recognized and matched to revenues. See Plaintiff's Final Memorandum in Opposition to Defendant's Motion for Summary Judgment (Final Memorandum) at 16. Sunshine also has submitted affidavits of its President, Marc J. Falkowitz, who asserts that [t]he 'matching principle' of cost accounting, with which I am familiar, requires costs to be matched as closely as possible with the revenues with which they are connected. Falkowitz Supp. Aff. at p 4 (emphasis added). 22 Falkowitz refers to Plaintiff's Supplemental Response to Defendant's Motion for Summary Judgment (Supplemental Response), which contains four alternative methods of calculating payroll expenses as a function of revenue, Supplemental Response at 10-14, and declares that, [b]ased on my accounting training and bookselling experience, the alternative assumptions are all reasonable. Falkowitz Supp. Aff. at p 6. He adds that a combination of two of those assumptions, see Supplemental Response at 13, is the most reasonable of all, Falkowitz Supp. Aff. at p 6. Finally, Falkowitz refers to Temple's document Estimated Cost of Selling a Text Book for the Past Fall Rush, which calculates cost on a per-volume basis, and labels the study totally unrealistic and without any value as a method of determining allocable payroll expense. It assumes perfect efficiency and would result in the cost of unproductive employee time being imposed entirely on cost centers other than textbooks. Falkowitz Supp. Aff. at p 7. Thus, the district court had before it more than one method of allocating the Bookstore's payroll expenses as well as Sunshine's critique of Temple's approach. 23 On the issue of inventory shrinkage, Sunshine again refers to Welsch & Anthony's conclusion that a periodic inventory system such as Temple's must be adjusted on a percentage basis to account for discrepancies between actual dollar revenues and revenues calculated from inventory changes, Final Memorandum at 3-4, as well as to the very broad Areeda-Turner definition of variable cost, which would appear to include inventory shrinkage, Supplemental Response at 5 (quoting 3 P. Areeda & D. Turner, supra, p 715c, at 173-74). Moreover, Falkowitz, in his affidavit, describes shoplifting as a cost of selling books, Falkowitz Supp. Aff. at p 3, and asserts that, [b]ased on my general knowledge of university bookstore loss rates, and my particular knowledge of Temple's location and poor security, an inventory-shrinkage estimate of one percent would be quite conservative, id. at p 8. 24 Fed.R.Civ.P. 56(e) makes it clear that an adverse party may not rest upon the mere allegations or denials of his pleading in opposition to a properly supported summary-judgment motion. See First National Bank of Arizona v. Cities Service Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 1592, 20 L.Ed.2d 569 (1968). When faced with defendant['s] sworn denial of the existence of [a Sherman-Act violation], it is incumbent upon the plaintiff to produce significant probative evidence demonstrating that a genuine issue of fact exists as to this element of the complaint. Pan-Islamic Trade Corp. v. Exxon Corp., 632 F.2d 539, 554 (5th Cir.1980), cert. denied, 454 U.S. 927, 454 U.S. 927, 102 S.Ct. 427, 70 L.Ed.2d 236 (1981); see also Tunnell v. Wiley, 514 F.2d 971, 976 (3d Cir.1975); Boulware v. Parker, 457 F.2d 450, 452 (3d Cir.1972). 25 Given this standard for summary judgment, we believe that Sunshine's submissions on the question of payroll allocation suffice to create a genuine issue of material fact with respect to Temple's cost and thus to withstand Temple's motion for summary judgment even in the face of the Cassel affidavits and the legal arguments proffered by Temple. 13 We note in this regard that several courts have rejected summary judgment as a means of deciding questions about the validity of conflicting methods of accounting. See, e.g., William Inglis & Sons Baking Co. v. ITT Continental Baking Co., Inc., supra note 9, 668 F.2d at 1038 (determination of fixed and variable costs is matter for jury); Greenville Publishing Co., Inc. v. Daily Reflector, Inc., 496 F.2d 391, 397-98 (4th Cir.1974) (denying summary judgment in predatory-pricing case involving dispute about accuracy of methods of cost accounting); In re IBM Peripheral EDP Devices Antitrust Litigation, 459 F.Supp. 626, 631 (N.D.Cal.1978) (Whether one method of accounting for costs actually incurred or another is proper is essentially a question of fact, and thus is not a proper subject for summary judgment.). We agree. 26 Because we find that the record presents a genuine issue of material fact, we will vacate the judgment of the district court and remand for further proceedings.