Hometown Grocers (HG) operates a grocery store in

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 lrofit dropped to only $355,000. 

Income from Operations, 2020

Sales                                     ($42,128,687)

Less Cogs                            (33,702,950)

Gross Margin.                     (8,425,737)

Selling/Admin Cost          (6,158,432)

Income from operations ($2,267,305)

Actual Income from Operations, 2021

Sales                                      ($29,490,081)

Less Cogs                            (23,592,081)

Gross Margin                      (5,898,016)

Selling/Admin Cost.         (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 damage as follows. First, based on anaysis of dales trends, she estinated that sales would have increased by 20% to $50,554,424. From this estimate, she subtracted cost of goods sold equal to 80%, 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 minir 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 Cogs                             (40,443,539)

Gross Margin.                      (10,110,885)

Selling/Admin Cost.          (6,258,432)

Income from Operations ($3,852,453)

Donna the 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% of them are variable.” Donna responded that she assumed they were fixed because that made the claim larger. “Look,” she saif “if you want some real money from this claim, you need to make assumptions that generate money.” And the more costs you assume are fixed, the higher the claim. 

Required: Explain why Donna’s assumption leads to a higher claim. Recalculate the claim assuming 40% of selling and administrative costs are variable. State and support the amount of damages you would recommend HG claim. Is Donna’s behavior ethical, why or why not?