PATENT INFRINGEMENT AND LOST PROFITS- a part of Forensic accounting
There are revolutionary changes to the market for tablet or smartphone-based applications and software. Farm SAT has developed GPS software that can now map a tractor's path in a field and analyze field terrain and conditions for farmers in real time. This has significant potential to increase the efficiency and yield of farms. A farmer mounts a GPS receiver on the roof of a tractor which is linked to a smartphone or tablet with Farm Sat's mapping software. The software records conditions, areas covered, and areas to be covered. As the tractor moves, farm Sat's software builds a data base that measures land area, time spent, and overlap in tractor coverage and areas missed, etc. to manage costs of seed, fertilizer, herbicides, etc. There is also a link to merge the data with local weather history and forecasts for data analytics. farm Sat's software/GPS is priced at $5,000. Farm equipment sellers and agricultural departments of government globally were quick adopters of the new software. The software provides valuable information for farmers, seed and facilities companies, governments, research groups, and others. The information is integrated into databases that can compile valuable information on the interaction of climate conditions, agricultural methods, crop growth and other variables. FarmSAT's application found rapid acceptance in its first year and the company was profitable even as a start-up. The first-year costs and revenue for this product were as follows:
Selling price5,000 per unit
Direct materials2,000 per unit
Direct labor500 per unit Variable manufacturing overhead400 per unit
Total fixed manufacturing overhead750,000
Variable selling and administrative250 per unit
Total fixed selling and administrative750,000
Sales volume 12,000 units
During the second year of production and sales, the company only sold 8,000 units. FarmSAT learned that it was the victim of a cyber-attack in that a competitor hacked its IT systems and accessed the research, design, production, and cost specifications for its software. FarmSAT learned that the competitor produced and sold an almost identical device at a lower cost. FarmSAT has filed a suit against the competitor for patent infringement as it believes that it would have sold at least the same number of units in the second year as in year 1. Assume that the competitor is found liable for patent infringement and that the infringement began at the beginning of the second year of FarmSAT's operation. In answering the following questions, use the information provided in the table above.
A. What are the contribution margin and the contribution margin percent for this product in the first year?
B. What are the damages to FarmSAT for the second year because of the patent infringement?
C. Using the facts above, what was FarmSAT's total profit on the product during the first year it was sold?
D. Compute the damages to FarmSAT in the second year if, at the beginning of the second year, market conditions resulted in all variable manufacturing costs increasing by 10% and all fixed costs increasing by 15% and that the selling price remained the same.
E. Assume that to mitigate the damages clue to patent infringement, FarmSAT created a special marketing prograrn in the second year to expand its customer base. The marketing program resulted in sales decreasing to 10,000 units rather than 8,000 units. The cost of the special advertising program in the second year was $1,000,000. Ignoring the cost increases in D. above, what are the damages to FarmSAT during the second year under this set of facts?
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