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.

You have been engaged by counsel for Bonanza Drink Co. to prepare a Rule 26 expert report on damages.

* 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.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 dont 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 years sales were impacted?What portion of the current years 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.

full question is attached as a word file.

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 90% of the points for the report portion of the case study will come from these three areas. Please be sure to adequately explain your methodology and assumptions. * 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. Bonanza Drink Co. Income Statements Per Tax Return 2003 Sales Cost of Goods Sold $ 2005 2,098,509 100.0% $ 1,231,449 58.7% 867,059 $ 2006 2007 2008 $ 938,800 100.0% $ 553,903 59.0% 384,897 $ $ 127,048 18,163 37,138 53,704 39,225 20,653 42,283 17,519 1,045 9,116 4,852 9,863 17,095 3,069 4,478 2,574 2,275 7,667 12,812 430,577 13.5% 1.9% 4.0% 5.7% 4.2% 2.2% 4.5% 1.9% 0.1% 1.0% 0.5% 1.1% 1.8% 0.0% 0.0% 0.3% 0.0% 0.5% 0.3% 0.2% 0.8% 1.4% 45.9% $ 96,195 19,328 55,635 51,114 15,130 85,061 75,893 19,623 5,350 1,011 28,065 8,751 26,913 1,243 12,317 2,747 19,685 3,941 14,889 13,009 13,412 569,313 4.6% 0.9% 2.7% 2.4% 0.7% 4.1% 3.6% 0.9% 0.3% 0.0% 1.3% 0.4% 1.3% 0.1% 0.0% 0.6% 0.1% 0.9% 0.2% 0.7% 0.6% 0.6% 27.1% $ 243,545 49,968 54,880 90,362 88,336 156,382 142,788 17,868 11,131 4,258 39,984 21,436 50,455 1,434 24,329 777 5,976 3,242 12,145 4,916 21,594 1,045,808 8.4% 1.7% 1.9% 3.1% 3.1% 5.4% 4.9% 0.6% 0.4% 0.1% 1.4% 0.7% 1.7% 0.0% 0.0% 0.8% 0.0% 0.2% 0.1% 0.4% 0.2% 0.7% 36.1% $ 431,561 85,331 62,814 98,267 124,540 199,725 77,668 20,067 13,861 15,305 98,695 12,018 54,923 15,628 3,224 34,072 4,137 9,628 5,663 19,070 13,019 29,586 1,428,803 10.3% 2.0% 1.5% 2.3% 3.0% 4.8% 1.9% 0.5% 0.3% 0.4% 2.4% 0.3% 1.3% 0.4% 0.1% 0.8% 0.1% 0.2% 0.1% 0.5% 0.3% 0.7% 34.1% $ 498,662 78,314 72,580 204,868 140,674 215,275 134,066 24,563 15,835 19,445 176,960 8,966 80,767 18,455 2,530 45,467 7,850 10,419 7,727 30,050 17,700 46,161 1,857,336 7.3% 1.1% 1.1% 3.0% 2.0% 3.1% 2.0% 0.4% 0.2% 0.3% 2.6% 0.1% 1.2% 0.3% 0.0% 0.7% 0.1% 0.2% 0.1% 0.4% 0.3% 0.7% 27.0% $ 427,743 85,812 71,421 214,226 134,515 222,923 133,181 24,937 17,945 24,790 192,924 11,423 79,477 24,790 2,066 57,493 7,939 16,527 7,939 33,053 17,466 49,580 1,858,167 9.4% 1.9% 1.6% 4.7% 2.9% 4.9% 2.9% 0.5% 0.4% 0.5% 4.2% 0.2% 1.7% 0.5% 0.0% 1.3% 0.2% 0.4% 0.2% 0.7% 0.4% 1.1% 40.6% $ (45,680) -4.9% $ 297,747 14.2% $ 238,848 8.3% $ 519,521 12.4% $ 1,097,189 16.0% $ 33,014 0.7% Salaries and Wages Repairs and Maintenance Rents Taxes and Licenses Interest Depreciation Advertising Amortization Auto and Truck Bank Charges Delivery and Freight Dues and Subscriptions Insurance Janitorial Laundry and Cleaning Legal and Professional Meals, Ent., and Certain Travel Exp. Office Expense Printing Telephone Travel Utilities Net Income per books 2004 2,894,508 100.0% $ 1,609,852 55.6% 1,284,657 $ 4,192,189 100.0% $ 2,243,865 53.5% 1,948,324 $ 6,866,963 100.0% $ 3,912,437 57.0% 2,954,526 $ 4,573,027 100.0% 2,681,845 58.6% 1,891,181 Bonanza Drink Co. Cost of Goods Sold and Other Inventory and Production Statistics 2003 2004 2005 2006 2007 2008 Cost of Goods Sold: Beg. Inventory $ Grapes Crushing Label, bottles, corks, other ingredients Packaging Labor Cost of Production Ending Inventory COGS - $ 718,890 $ 830,762 $ 733,438 $ 910,811 $ 2,518,698 634,766 32,855 271,435 271,435 62,303 1,272,793 669,940 34,676 286,476 286,476 65,755 1,343,322 754,326 39,044 322,560 322,560 74,037 1,512,527 1,207,517 62,501 516,351 516,351 118,518 2,421,238 2,753,089 142,499 1,177,259 1,177,259 270,217 5,520,324 735,000 38,043 314,296 314,296 72,141 1,473,776 718,890 830,762 733,438 910,811 2,518,698 1,310,629 $ 553,903 $ $ 27,383 328,596 452 1,403 3.87 $ 1,231,449 $ $ 28,745 344,940 458 1,464 3.89 $ 1,609,852 $ $ 29,001 348,012 482 1,566 4.35 $ 2,243,865 $ $ 41,930 503,160 697 1,733 4.81 $ 3,912,437 $ $ 86,770 1,041,240 1,440 1,911 5.30 $ 2,681,845 $ $ 21,084 253,008 350 2,100 5.83 Production Statistics: # of cases produced # of bottles produced Tons of grapes purchased Cost per ton of grapes Average cost per bottle of finished goods Inventory Statistics: Beginning inventory - 185,595 213,324 168,754 189,277 475,075 Production 328,596 344,940 348,012 503,160 1,041,240 253,008 Ending inventory 185,595 213,324 168,754 189,277 475,075 225,000 Bottles Sold 143,001 317,211 392,582 482,637 755,441 503,083 Overview of Financial Forensic Accounting Answer 1 The firm has taken all its initiatives to mitigate the risks in the business, and the associated loss of revenue. At the initial level the firm has tied up with a supplier for the supply of the raw materials, which are grapes for its business. The firm has also developed a business model whereby the firm has planned to sell the wines at a premium in the coming year, by hoarding a large quantity of material. With the product which the company sells, i.e. Wine, the larger the period for which the same is stored, the better shall be the quality of the material, and the better shall be the price which it can command from the market. All these are helpful in mitigating the business risks. We can see from the business model that although the inventory were as high as 225,000 the profits are near to 0%. The reason for the same is increase in the costs of the concern. If we consider the overall cost structure, the same has increased by 13.6% from the past year, resulting into an overall fall in the profits of the concern. Answer 2 The figures presented in the financial statements presents that the sales for the year 2008 have been greatly affected in this process, and we have not received a favorable response from the market for the current year. In all the years under review, the markets showed an upward trend and the sales figure were rising, except for the current year under consideration, where the markets for the first time have shown a downfall in the sales figure. The following is the details of sales of the company based on the production figures: Particulars Sales in Same Year Sales in Following Year Total 2003 2004 2005 2006 2007 2008 43.52 56.48 100.00 38.16 61.84 100.00 51.51 48.49 100.00 62.38 37.62 100.00 54.37 45.63 100.00 11.07 88.93 100.00 The above is the year wise analysis of the sales of the concern over the period of 6 years. Answer 3 The following are the figures presented for the yield per ton of the product manufactured: Particulars Bottles Produced Tons of Grapes Purchased Yield per ton 2003 2004 2005 2006 2007 2008 328,596 344,940 348,012 503,160 1,041,240 253,008 452 458 482 697 1,440 350 726.28 753.79 722.33 722.30 722.88 722.88 Answer 4 The following is the calculation for the bottles that could have been manufacture with the unsupplied grapes: Total Quantity Ordered = 1500 Actually Delivered = 350 Short Delivered = 1150 Yield per ton of Grapes = 722.88 bottles Bottles short manufactured = 831,312 bottles Answer 5 The following are the details of total lost sales: 2008 Sales Value 2008 Sales Qty Selling Price per unit Qty Short Manufactured Revenue Lost 4,573,026.60 503,083.23 9.09 831,312.00 7,556,626.08 Answer 6 Cost of Sales is a composite of Cost of Goods Sold, Administrative Cost, and Selling and Distribution expenses. The following are the details of cost of sales for the company over the period under review: Particulars 2003 2004 2005 2006 2007 2008 Cost of Goods Sold Other Costs Cost of Sales Quantity Sold Cost of Sales per unit 553,903 430,576 984,480 143,000 6.88 1,231,449 569,312 1,800,761 317,210 5.68 1,609,851 1,045,808 2,655,660 392,582 6.76 2,243,864 1,428,803 3,672,667 482,637 7.61 3,912,437 1,857,336 5,769,773 755,441 7.64 2,681,845 1,858,167 4,540,012 503,083 9.02 These costs are not fixed in nature, and neither they are completely variable. The same is semivariable, with some costs like material costs being of a variable nature, while the others like, salary being of fixed nature. Moreover, the fact that per unit cost of sales is growing on increasing and in the year when the quantity sold has fallen substantially, the same has increased, is an indicative fact of semi-variable nature of expenses. The following table shows the details of historical cost of sales % Particulars 2003 2004 2005 2006 Cost of Sales Sales Cost of Sales per unit 2007 2008 984,480.4 4 938,800.26 1,800,761.7 4 2,098,508.59 2,655,660.0 3 2,894,508.30 3,672,667.7 4 4,192,189.07 5,769,773.6 4 6,866,962.76 4,540,012.3 9 4,573,026.60 104.87 85.81 91.75 87.61 84.02 99.28 Based on the recent % of cost of sales, the following is the amount of cost of sales for lost sales: Cost of Sales for Lost Sales = 831312*9.02 = 7,498,434 Answer 7 The operating expenses which are variable are as follows: Grapes Crushing Label, bottles, corks, other ingredients Packaging Labor It is because; they are the ones which are in constant change with the change in the Quantity Manufactured, and not others. The total operating expenses saved are as follows: Particulars Grapes Crushing Label, bottles, corks, other ingredients Packaging Labor Total Total Cost 735,000.00 38,043.48 314,296.20 Qty Manufactured 253,008.00 253,008.00 253,008.00 Cost per unit 2.91 0.15 1.24 Lost Sales (units) 831,312.00 831,312.00 831,312.00 Total Lost Sales Costs 2,415,000.00 125,000.00 1,032,687.50 314,296.20 72,140.58 253,008.00 253,008.00 1.24 0.29 831,312.00 831,312.00 1,032,687.50 237,033.33 4,842,408.33 Answer 8 Total Quantity for aging = 625000 Rate at which sales expected = $ 15 Lost Revenue = $ 9,375,000 Associated Costs Savings from the same = 625000*9.02 = $ 5,637,500 Answer 9 The lost profit due to breach of contract is: Revenue Lost = 7,556,626 Less: Cost of Sales = 7,498,434 Profit thereon = $ 58,192