Sterling, Inc. is a manufacturer of state-of-the-art computers. For the past ten years, Sterling has acquired all of its microch
ips from NoBugs Corporation, the only producer of chips meeting Sterling's high specifications. The relationship has been mutually profitable. Sterling could not have built its reputation as an industry leader without NoBugs's reliable and consistently high-quality products; Sterling's business has enabled NoBugs to grow rapidly while providing its investors with an attractive rate of return. Some months ago, several of Sterling's computers exploded shortly after installation. Upon investigation, Sterling discovered that tiny imperfections in NoBugs's microchips had aggravated a dormant design defect in the computers, causing the explosions. Analysis of the chips indicated that they were indeed below specifications and that the imperfections were caused by a slight miscalibration of NoBugs's encoding equipment. NoBugs recalibrated the equipment and promptly resumed production of perfect chips.
Sterling's losses from the explosions - lost profits, out-of-pocket costs associated with compensating customers for the explosions, and injury to business reputation - are estimated to exceed $20 million. Sterling and NoBugs disagree on the amount of the loss for which NoBugs should be responsible. Sterling has a strong legal case for breach of contract against NoBugs. Sterling's CEO is considering a lawsuit. She asks you to prepare a report discussing litigation strategy and the advantages and disadvantages of litigation; and discussing pretrial planning should the company opt for litigation.
Litigation strategy: Supplier N produces imperfect products, causing damage in business and market reputation of Company S. It is a clear case of negligence of N. The supplier should have more careful before supplying goods. The material should be checked before delivery. If it is not done, at least the company should be informed that the material is sent unchecked, so that the company can do the checking.
The supplier has done nothing, which creates a huge loss to the company. The business and relationship between the company and the supplier is not new. It is almost ten year
Explanation: Operating income refers to the income that the company earns from performing its core operations. It is also denoted as EBIT. Thus, the difference between operating income and income after tax is the tax that has been deducted from the operating income.
While calculating accounting profit, opportunity cost is not deducted from the revenue hence before tax and after tax depicts the investments that were made to earn that profit.
