KROGs MetalFab Inc.

Case Background

Product produced are aluminum storm windows, framing materials,

ladder etc.

Production facility based in Chicago and Moline.

Fire destroyed the Chicago Plant, part of Labor shifted to Moline.

Insurance Policy of lost profit coverage

Lost Profit Coverage meant to compensate the company for

profits lost due to reduced operating capacity due to an accident
for the period of 12 months.

Chief Accountants Analysis

Sales in 2012

$5,091,094

Predicted Sales (7% Growth)

$5,447,471

Actual sales in 2013

$3,857,499

(A) Lost Sales

$1,589,972

(B)Profit as a percent of 2012 sales

2.15%

Lost profit =Lost sales*Profit/Sales

$34,184

Fixed & Variable costs

Fixed costs = Administrative Expense

Variable Costs = COGS + Selling Expense

Account Analysis Method

Variable Cost/Sales = COGS/Sales + Selling Expense/Sales

= 4518475/5091094 + 217124/5091094
=0.8875 + 0.042 =0.93

Total Fixed Cost = Total Administrative Expense = $246000

Estimated Profit = Estimated Sales Estimated Cost

=5447471 (0.93*5447471 + 246000)
=$381323

Loss in profit = Estimated Profit Actual Profit = 381323-(-727836) = $1109159

High Low Method

Variable Cost/Sales = variable Cost due to highest activity-Variable cost due to lowest
activity
Highest Activity Lowest Activity

Highest Activity corresponds to August 2012

Lowest Activity corresponds to April 2012
Estimated Total Cost= Variable cost/sales*estimated sales + Fixed cost
=0.438* 5,447,471 +246000 =$2631992
Estimated Profit =Estimated sales- Estimated total cost 5,447,471 - 2631992=$2815479
Lost Profit = Estimated Profit Actual profit = 2815479-(-727836) = $3543315

Regression Method
Variable cost/sales
Estimated Sales
Estimated Cost
Estimated Profit
Actual profit
Loss In Profit

0.3637
5434360
2237249
3197111
-727836
3924947

Recommendation

Due to substantial loss in profit as calculated in each of the

methods,we recommend Mr Krog to aggressively pursue a
substantial claim for lost profit

The fundamental Flaw in peter Newells analysis was that he did not
separate cost into fixed and variable leading to flawed estimation
of total cost.