Dexter Manufacturing entered into an agreement with the Delta Salt Mining Company to build and be the exclusive supplier of heavy-duty product conveyor belt systems for the companys mining operations. The conveyor belt systems are used to move mined salt from the working surfaces to the crusher rooms, where it is crushed and sifted into various sizes and grades of marketable salt. Additional conveyor belt systems are used to send the crushed and graded salt to shipping areas above ground.

Until this contract, Delta purchased conveyor belt systems from several different suppliers. Delta entered into agreement with Dexter Manufacturing in order to have a stable supply of product conveyor belts at a reasonable and constant price for three-year period. During the first 15 months of the contract Dexter supplied $2,700,000 of conveyor belt systems to Delta at nine different mine sites. At this time Dexter approached Delta with a proposition to raise the price of conveyor belt systems by 15% percent for the remaining life of the contract. Dexter claimed that during first 15 months of the contract the company had actually lost 10 percent on the sale of belt systems. They further stated that they would be happy to continue with the contract if they could earn just 5 percent on the remaining contract sales.

Delta management is not pleased with the Dexter Manufacturing proposal. Management of Delta Salt Mining Companys considering litigation to force Dexter to honor the remaining terms of the agreement or to pay the damages caused by the breach of contract. In order to get some idea about the various issues and costs associated with legal action, Deltas management committee has asked you, as head of accounting department to perform some analysis to help with the decision, in particular, the committee would like to know the following:

1. How much in losses do you think Dexter may have experienced on the current contract so far? What information would like to have from Dexter to do further analysis on the issues?
2. What extra costs might Delta experience if it goes along with the Dexter proposal?
3. What costs, other than the ones already mentioned, might Delta want to consider before it went forward with litigation against Dexter Manufacturing?
4. If Delta sued Dexter, what would be the basis for its damages in the case?
5. Are there any non-accounting issues Delta should consider in this case? If so what are they?