The Fernald Corporation manufactures commercial shipping containers and trailer bodies for trucks. Several years ago, Fernald bought $\$ 160,000$ of coating materials to rustproof and paint 500 units of containers. Fernald alleged that the coating products were faulty, claiming that shortly after the products were completed, many of the units started rusting and the paint began peeling off. Most of the units were sandblasted to remove the old coating materials, then the units were recoated. The coating materials were supplied by the Industrial Paint Products Company (IPPC). IPPC claimed that Fernald personnel attempted to apply the coating to surfaces that were not properly prepared for the coating. Fernald denied that allegation. In an effort to keep a good customer happy, IPPC did not bill Fernald for the alleged bad coating and provided new coating materials for the 500 units free of charge.

Fernald's management continued to pursue the idea that it had suffered far more damages than just the cost of the coating materials. On several occasions during the last several years Fernald has asked Industrial Paint Products to make an offer to settle the dispute between the two companies. Last year, Fernald asked its attorney to file suit against IPPC for alleged damages associated with supplying the bad coatings. An expert, Karen Scott, has been hired, and she has prepared a damages estimate for the dispute. Before the conflict goes any further, Fred Culter, vice president, finance for Fernald, sent a letter to John McCoy, CEO at IPPC, in an effort to settle the dispute before the litigation process. The letter is presented below.

\section*{Mr. John McCoy, CEO}

Industrial Paint Products Company 2929 South Cedar Drive Yorktown, Ohio, 32850

\section*{Dear Mr. McCoy:}

Fernald has been a customer of IPPC for over a decade. We have never had any real problems with your company before this situation. We believe we have been patient about this matter. We have hired a professional accounting expert witness to compute the damages associated with the events in this case. She has talked with many of our operations people and has carefully calculated damages based on the facts. We hope you will review this information and be willing to settle the case so we can get on with normal business relationship with your firm.

Mr. McCoy, I hope you will agree with me that the time has come to put this issue behind us. We have been waiting patiently for four years now for your firm to settle this matter. It is hard to envision us continuing to have a positive business relationship with this hanging over our head. Below are the most recent calculations Karen has prepared:

If you have any questions about any of this, please give me a call. I look forward to bringing this matter to a close and getting on with our solid business relationship.
Fred Culter Vice President, Finance You have been hired by IPPC as an accounting expert witness. Initially, you will be providing litigation advice to the IPPC's

attorney, but you may have to prepare an expert report and testify in the case. Currently, the attorney needs some advice about the nature and probable validity of Fernald's expert's damages estimate. Provide some guidance and advice on the following:

a. For each component of the damages estimate, indicate what documents, accounting records, or other information you would need to review to evaluate the validity and the amount of the item.

b. Based on the limited case information you currently posses, do any of the damages estimate components appear to be questionable?

c. What kinds of analyses do you plan to do to evaluate each of the components of the damages estimates?

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Cost to sandblast and recoat shipping containers.......... $540,000 Cost of coating materials. .........160,000 Cost of lost production....... .800,000 Cost of labor inefficiencies. 490,000 Lost sales (4,000 units @ $700)........ 2,800,000 Cost of negative goodwill 1.000.000 Total Damages...... $5,790,000