31. Assume you have been retained as an expert witness for a client who is the defendant in the case, and your client is alleged to have breached a contract and caused damages of $3,000,000 which includes added costs and lost profits. The contract required that your client supply hardwood lumber to a furniture manufacturer for a three-year period. After six months your client found it could not supply the lumber in the quantity required by the plaintiff in the case and quit shipping lumber. Your client states that there is no way the damages could be anywhere near the amount alleged in the suit because your client was selling hardwood lumber to the plaintiff at "about the market rate." The plaintiff alleges that because it could not get the lumber from our client, it had to buy in the open market and it paid more for the lumber and lost production output and gross margin on its furniture products. Your preliminary analysis of the case data finds the following:

1. The plaintiff purchased a total $1,200,000 of hardwood lumber from your client during the first six months of the contract.

2. Your client was supplying hardwood lumber under the contract at about eight percent below market rate for similar hardwood sales.

3. The plaintiff's average gross margin on sales is 35 percent and its average profit on sales is 10 percent.

4. The plaintiff's average sales volume over the last five years has been $10,000,000 per year.

5. During the six months immediately after the contract was breached, the plaintiff's average sales were $800,000 per month.

6. Your analysis of the plaintiff's average variable costs for operating expenses is 70 percent fixed and 30 percent variable.

Required: As the defendant's expert witness:

a. What is your best estimate of the damages that the plaintiff has suffered as a result of your client's breach of contract?

b. Based on the information provided, does the plaintiff's "lost profits and added costs" allegation have any basis in fact? Show necessary calculations to support your position.

c. If asked to provide the court with a "theoretical model" of the basis of your damages, what

would you provide?

d. What additional information, if any, might you like to have to refine your damage estimates a bit more?