A company or organization can lose profits as a result of different activities and events such as litigation or an environmental disaster. To calculate lost profits, you need a variety of data relating to the incident. A comparison of sales and manufacturing costs before and after the event is helpful in calculating lost profits. When a company loses profits, it can affect the entire organization as a whole. Profits will usually return to their previous level when a company is no longer affected by the event.
Make a list of all information concerning the event that led to a loss of profits. Whenever a company is involved in legal action, it’s a good idea to determine all details of the litigation. Make a note of when the legal action started. Determine how sales revenue and costs are affected. Try to determine when the affect from legal action stopped, according to "Wis Law Journal."
Review the company’s sales revenue prior to the event. If sales revenue were $10,000,000 per month for April 1 through April 30 before the event, you have a good starting point to make an assessment about the loss incurred. These sales figures assume you sold 50,000 units at a price of $200 per unit. The cost to manufacture each unit is $110.
Calculate the profit for the month of April during the current year. Determine the costs to manufacture each unit. Take $110 and multiply it times 50,000 units. Total costs for the month of April equals $5,500,000 based on this calculation. Net profit for April equals $4,500,000, ($10,000,000 - $5,500,000).
Subtract the total amount of manufacturing costs from total sales for the period of May 1 through May 30 to get net profit. Sales were $3,000,000 for the period of May 1 through May 30. The number of units produced is 15,000 at a cost of $110 per unit. Total costs were $1,650,000. The net profit for the month of May was $1,350,000, ($3,000,000 - $1,650,000).
Deduct the costs that were not incurred from the lost revenue to determine lost profits. Because revenue decreased from $10,000,000 to $3,000,000, you lost $7,000,000 in revenue, which equals 35,000 units. Because each unit costs $110, you did not incur costs of $3,850,000. The lost profits were $3,150,000
This example assumes profits returned to the normal level the next month. The effect of the event only lasted one month for simplicity purposes.
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