Assignment: Overview of Financial Forensic Accounting
Case Facts:
1. Bonanza Drink Co. is a beverage company located in Napa Valley. Bonanza Drink Co. began its operations in 2003.
2. Bonanza Drink Co.'s only product is a Napa Chardonnay wine.
3. Bonanza Drink Co. sells its product to specialty grocery stores.
4. Bonanza Drink Co. rents its production facility.
5. In 2003, Bonanza Drink Co. sold directly to selected grocery stores. Since 2004, Bonanza Drink Co. has sold its products through a distributor.
6. Bonanza Drink Co. purchases Napa Valley Chardonnay grapes every year from The Grape Guys.
7. Bonanza Drink Co. had a contract to purchase 1,500 tons of Chardonnay grapes from The Grape Guys' 2008 harvest at $2,100 per ton. The Grape Guys only delivered 350 tons of grapes.
8. 2008 was a high demand and low harvest year for Chardonnay grapes and Bonanza Drink Co. suspects that The Grape Guys may have sold the grapes due Bonanza Drink Co. to a higher bidder.
9. Bonanza Drink Co. planned on building its 2008 ending inventory to 625,000 bottles, as part of a strategy to age the wine and sell it at a premium. Bonanza Drink Co. expected to sell the wine at $15 per bottle in 2011. Instead, Bonanza Drink Co. sold a portion of that stock to minimize its 2008 losses. Additional storage costs of the wine would have added $355,000 per year to operating costs beginning in 2008.
10. Despite its best efforts, Bonanza Drink Co. was unable to acquire replacement grapes.
11. Bonanza Drink Co. has sued The Grape Guys for breach of contract.
12. Please see Excel file for other Bonanza Drink Co. financial data.
Assignment:
You have been engaged by counsel for Bonanza Drink Co. to prepare a Rule 26 expert report on damages. Your report should address the following areas:
1. Your assignment
2. Your qualifications
3. Compensation
4. Information considered
5. Opinions*
6. Basis of opinions
7. Exhibits, if any
* You have discussed this assignment with your mentor, and together you have identified the following important considerations that must be addressed in order to arrive at the opinions in your report. Therefore, in addition to the Rule 26 report, the deliverables for your final exam will include the answers to the questions below (it's an important part of your grade!). Please answer each question in an organized manner (no unformatted excel schedules please!). When preparing your report, remember that where you address these considerations in your opinions, you should discuss the points as part of an organized narrative (please don't copy and paste the Q&A into your report).
1. Bonanza Drink Co. has done its best to mitigate damages. How so? How does one reconcile that with the facts that profits in 2008 were close to $0 though inventory was year-end inventory was still 225,000 bottles?
2. Which fiscal year's sales were impacted? What portion of the current year's production is sold during the current year versus the following year, given that Bonanza Drink Co. uses the FIFO approach for its inventory?
3. Historically, what was the yield per ton (i.e. how many bottles per ton of grapes)?
4. How many bottles could have been produced with the undelivered grapes?
5. What would have been Bonanza Drink Co.' selling price per bottle (for the bottles produced from the undelivered grapes)? Calculate the total lost sales.
6. What would have been the cost of sales per bottle? What are the components of the cost of sales? Are those components variable or fixed costs? And why (discuss the evidence)? What were the historical costs of sales percentages? Calculate the total cost of sales related to the lost sales.
7. Identify operating expenses that are variable. Which ones are they? Why? Estimate the total operating expenses that were saved.
8. What are the lost revenue and avoided costs associated with Bonanza Drink Co. foregoing the aging of its product to sell at a higher price in 2012.
9. Concludes as to lost profits due to the alleged breach of contract.