Brief Fact Summary. Plaintiff Vitex Manufacturing Corp. and Defendant Caribtex Corp. entered into a legally binding contract that Defendant breached. Plaintiff sued for the breach and claimed damages for loss of profits, which Defendant argues should be reduced by Plaintiff’s overhead expenses.
Synopsis of Rule of Law. Overhead should be treated as part of gross profits and recoverable as damages rather than considered part of the seller’s costs.
Issue. Should overhead expenses be considered part of Plaintiff’s costs and therefore deducted from Plaintiff’s lost profits?
Held. No. Since overhead is a fixed cost and nonperformance of a particular contract produces no cost savings, no deduction from lost profits is warranted. In short, overhead expenses do not bear a direct relationship to any single transaction to be considered a cost in ascertaining lost profits. Further, even if overhead expenses were considered, they would have to be considered a loss incurred, not a cost that would reduce lost profits. As an example, if the fixed overhead is $10,000 and the company engages in five transactions, the profit on each transaction would be reduced by $2,000. However, if one transaction is not completed, the profit on each remaining transaction is reduced by $2,500. Hence, repudiation of a single contract reduces the profitability of all other transactions. Therefore, if overhead expenses were considered, Defendant would still lose out.
Discussion. Overhead expenses must not be deducted from gross profits.