Bruce McIntosh Consulting Hometown Grocers (HG) operates a grocery store in Littletown and had income from operations in 2020 of $2,267,305 In 2021, another grocery store opened in the strip center in violation of the landlords lease agreement with HG The result was that sales of HG declined by 30 percent and profit dropped to only $355,000 Income From Operations, 2020 Sales $ 42,128,687 Less cost of goods sold 33,702,950 Gross margin 8,425,737 Selling and administrative costs 6,158,432 Income from operations $ 2,267,305 Actual Income From Operations, 2021 Sales $ 29,490,081 Less cost of goods sold 23,592,081 Gross margin 5,898,016 Selling and administrative costs 5,542,589 Income from operations $ 355,427 HG has decided to sue the landlord for damages and has hired Bruce McIntosh Consulting to help with the calculations Donna Sprague is the consultant assigned to the engagement and she calculated damages as follows First, based on analysis of sales trends, she estimated that sales would have increased by 20 percent to $50,554,424 From this estimate, she subtracted cost of goods sold equal to 80 percent, which is the same percent as in 2020 She then assumed that selling and administrative costs are essentially fixed and subtracted 2017 costs with a minor increase of $100,000 That led to forecasted income from operations of $3,852,453 Forecasted Income From Operations, 2021 Sales $ 50,554,424 Less cost of goods sold 40,443,539 Gross margin 10,110,885 Selling and administrative costs 6, 258,432 Income from operations $ 3,852,453 Donna then calculated damages to be forecasted income minus actual income resulting in a claim of $3,497,026 (i e $3,852,453 $355,427) HG management reviewed the calculation and had only one question, Why did you assume that selling and administrative costs are fixed About 40 percent of them are variable Donna responded that she assumed they were fixed because that made the claim larger Look, she said If you want some real money from this claim, you need to make assumptions that generate real money And the more costs you assume are fixed, the higher the claim Required Explain why Donnas assumption leads to a higher claim Recalculate the claim assuming 40 percent of selling and administrative costs are variable State and support the amount of damages you would recommend HG claim Is Donnas behavior ethical Why or why not

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Bruce McIntosh Consulting Hometown Grocers (HG) operates a grocery store in Littletown and had income from operations in 2020 of $2,267,305  In 2021, another grocery store opened in the strip center in violation of the landlords lease agreement with HG  The result was that sales of HG declined by 30 percent and profit dropped to only $355,000  Income From Operations, 2020 Sales $ 42,128,687 Less cost of goods sold 33,702,950 Gross margin 8,425,737 Selling and administrative costs 6,158,432 Income from operations $ 2,267,305 Actual Income From Operations, 2021 Sales $ 29,490,081 Less cost of goods sold 23,592,081 Gross margin 5,898,016 Selling and administrative costs 5,542,589 Income from operations $ 355,427 HG has decided to sue the landlord for damages and has hired Bruce McIntosh Consulting to help with the calculations  Donna Sprague is the consultant assigned to the engagement and she calculated damages as follows  First, based on analysis of sales trends, she estimated that sales would have increased by 20 percent to $50,554,424  From this estimate, she subtracted cost of goods sold equal to 80 percent, which is the same percent as in 2020  She then assumed that selling and administrative costs are essentially fixed and subtracted 2017 costs with a minor increase of $100,000  That led to forecasted income from operations of $3,852,453  Forecasted Income From Operations, 2021 Sales $ 50,554,424 Less cost of goods sold 40,443,539 Gross margin 10,110,885 Selling and administrative costs 6, 258,432 Income from operations $ 3,852,453 Donna then calculated damages to be forecasted income minus actual income resulting in a claim of $3,497,026 (i e  $3,852,453   $355,427)  HG management reviewed the calculation and had only one question, Why did you assume that selling and administrative costs are fixed  About 40 percent of them are variable  Donna responded that she assumed they were fixed because that made the claim larger  Look, she said  If you want some real money from this claim, you need to make assumptions that generate real money  And the more costs you assume are fixed, the higher the claim  Required Explain why Donnas assumption leads to a higher claim  Recalculate the claim assuming 40 percent of selling and administrative costs are variable  State and support the amount of damages you would recommend HG claim  Is Donnas behavior ethical  Why or why not

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Bruce McIntosh Consulting:Hometown Grocers (HG) operates a grocery store in Littletown and had income from operations in 2020 of $2,267,305. In 2021, another grocery store

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Sales	$	42,128,687
Less cost of goods sold		33,702,950
Gross margin		8,425,737
Selling and administrative costs		6,158,432
Income from operations	$	2,267,305

Sales	$ 29,490,081
Less cost of goods sold	23,592,081
Gross margin	5,898,016
Selling and administrative costs	5,542,589
Income from operations	$ 355,427

Sales	$ 50,554,424
Less cost of goods sold	40,443,539
Gross margin	10,110,885
Selling and administrative costs	6, 258,432
Income from operations	$ 3,852,453