
    546 F. 2d 386
    GIBRALTAR MANUFACTURING COMPANY v. THE UNITED STATES
    [Nos. 597-71 and 364-72.
    Decided December 15, 1976]
    
      
      Walter A. I. Wilson, for plaintiff. John T. Koehler, attorney of record. Hudson, Oreyhe, Koehler & Tache, of counsel.
    
      Gerald L. Schrader, with, whom was Assistant Attorney General Bex E. Lee, for defendant.
    Before Skelton, Nichols, and Kunzig, Judges.
    
   Per Curiam:

These cases, which were consolidated for trial, come before the court on plaintiff’s and defendant’s exceptions to findings of fact and recommended decision on October 14,1975, by Trial Judge George Willi, in accordance with Bule 134(h). He redetermined after trial the alleged excessive profits received or accrued by plaintiff during its fiscal years ended June 30,1967 and June 30,1968, on defense contracts and subcontracts, under 50 U.S.C. App. §§ 1212-18, as amended.

The case has been submitted on the briefs of the parties and oral argument of counsel. Upon consideration thereof, since the court agrees with the said recommended decision, as hereinafter set forth, with modifications to be explained, it affirms and adopts the said decision, as modified, as the basis for its judgment in this case.

The plaintiff argued orally that the then very recently announced decision of Butkin Precision Mfg. Corp. v. United States, 211 Ct. Cl. 110, 544 F. 2d 499 (1976), mandated a clearance herein. The cases do have similarities. Both involve small industrial concerns specializing in the production of one or a few difficult component parts of military hardware of the more complex varieties. Both were well managed and efficient, largely because of the unusual skills of the founder and owner. Both had a history of “normal” existence on a thin diet of profit, followed by greatly increased volume and profit during a brief flurry of war demand. Both pose difficulty in fair dealing in renegotiation under the fiscal year method, with danger of tunnel-visioned concentration on profitable years only, in disregard of thin years of preparation and recuperation. We determined that Buthin was entitled to a clearance, using the thin pre-war years as a base period of “normal” earnings but with very substantial upward adjustment in allowable profit expressly required by statute and regulation. We held, alternatively, that defendant failed in its burden of proof because of its failure to quantify or “cap” a demonstrated “contribution” that could have warranted a clearance all by itself, or with other favorable factor considerations. Plaintiff here does not fare so well. With a similar thin “starting point” it has not demonstrated its right to factor adjustment of such magnitude. Comparison of the factor analysis in this opinion with that will exemplify the statement. Defendant at the least of it has earned its burden of proof that excessive profits were realized in some substantial amount, equalling or exceeding for each year the minimum $40,000 determination prescribed in KBK. § 1460.5(a).

The difficulty is to fix figures, as we must, with the “abouts” and “approximatelys” left off. Comparisons here are not very helpful. Those tendered by plaintiff, using IRS statistical composites, fail for the same reasons as those tendered by defendant in ButTcin. About all else that is offered is the excess of other bids, over plaintiff’s for items plaintiff supplied. These were unsuccessful bids, generating no awards. The probative value is therefore less than in Buthin, where higher bidders were also successful, in the sense that they were awarded subcontracts for the same components Buthin supplied, after Buthin?s capacity was fully utilized. Such comparisons have much more weight, for many obvious reasons.

Plaintiff’s pre-award profit estimates of 2.45% to 5% are properly treated as not controlling. Plaintiff refused to allow defendant to verify its figures, which obviously were in the nature of seller’s talk. There is no statutory or regulation factor giving weight to that. The defendant’s negotiators disregarded it and projected that 10% of cost was a fair amount of profit for plaintiff, which the prices contracted for would allow. In Mason & Hanger-Silas Mason Co. v. United States, 207 Ct. Cl. 106, 518 F. 2d 1341 (1975), we held that plaintiff there could not avail itself of such expectation to support a higher profit than the court deemed otherwise justified. Nor can defendant use them here.

The trial judge inveighed against being asked to render a “jury verdict”, in language we leave standing to explain our comment upon it. In A. C. Ball Co. v. United States, 209 Ct. Cl. 223, 531 F. 2d 993 (1976), we objected to the term “jury verdict” while holding that the broad brush approach there used was appropriate and necessary under the Act. We think that in executing our responsibilities under 50 U.S.C. App. § 1218, it will at times be necessary to select a course among possible alternatives, none of which the evidence obliges us to accept, or to reject. Cf. The Conqueror, 166 U.S. 110, 131 (1897); and Meredith Broadcasting Co. v. United States, 186 Ct. Cl. 1, 405 F. 2d 1214 (1968). In choosing among possible alternatives, none of which the evidence may not accord the Board decision a presumption of correctness, or treat it as evidence in support of its conclusion. We do think we may take a sideways glance at it as a mere suggestion. This is what the trial judge did, we think properly. Unfortunately, he appears to have misconstrued the Board decision in some respects, and in making our own, we must look at it through our own eyes, not his.

The trial judge recommended that we adopt the Board’s refund amounts, $125,000 for fiscal year ending June 30, 1967, and $475,000 for fiscal year ending June 30, 1968. However, when we examine the Board decision and the one recommended for us, we observe a discrepancy which may be summarized as follows:

In the second line for each year, the trial judge’s “Profits” were lower than the Board’s because the Board had made salary disallowances which defendant did not insist on and did not obtain here. In some instances restoration of a dis-allowance may be partially or entirely offset by treating the contractor as a “high cost contractor,” but in this case the restoration does not make the costs high enough to have any effect in factor analysis. Defendant believes the high salaries were justified. Logically it would seem that one who wished to follow the Board (as the trial judge did) would wish to leave the contractor with the same retained profit the Board did. This the trial judge’s proposed decision does not do. Moreover a portion of Finding 34, which we have modified, asserts that the Board allowed 10.62% of sales for fiscal year 1967, and 10.35% of sales for fiscal year 1968. This apparently reflected the sales without adjustment, but by KBB. § 1460.3 the determination should “adjust” the sales by subtracting the excessive profit to be eliminated. We have made the adjustments in our calculations above, with respect to both the Board’s decisions and the ones the trial judge proposes.

We conclude on all the evidence that the plaintiff realized excessive profits of $65,000 in its fiscal year 1967, and $375,000 in its fiscal year 1968, both figures before adjustment for State and Federal taxes. This summarizes as follows:

Differing with the Board, we think that the plaintiff is entitled to a somewhat more favorable ratio of adjusted profit to sales in its fiscal year 1968 because only in the 1967 year it used Government-furnished machinery at a moderate if not nominal rental. The efficiencies resulting from plaintiff’s technical innovations were fully realized only in the 1968 year. See Findings 10-14. We agree with the trial judge’s opinion and findings respecting plaintiff’s performance. They warrant upward adjustment of the retained profits over what the low base period earnings would indicate, to the extent allowed by the Board, and by us.

Accordingly, the court determines as a matter of law that the plaintiff realized excessive profits of $65,000 and $375,000, before adjustment for State and credit for Federal taxes on income, in the fiscal years ended June 30,1967, and June 30, 1968, respectively.

Since we cannot determine from the record whether plaintiff has paid the Board refunds, or either of them, and since our determination will require new calculations of the State tax adjustment (RBR § 1459.9) and the Federal tax credit (RBR § 1462.1 and ft'.), we remand the cases to the trial division for Rule 131 (c) proceedings rather than entering a money judgment at this time.

The opinion and findings of the trial judge, as modified by the court, are as follows:

Willi, Trial Judge:

The Renegotiation Board (the Board) determined that, before allowance for state and federal taxes on income, $125,000 of the profit earned by plaintiff on its renegotiable business for fiscal year ended June 30, 1967 and $475,000 of the profit earned by it on renegotiable business done in its fiscal year ended June 30, 1968 constituted excessive profits. Plaintiff brought this suit to challenge both of those determinations in their entirety. In turn, the Government contends in this de novo proceeding that a preponderance of the evidence demonstrates that plaintiff’s excessive profits amounted to not less than $275,000 and $525,000 for the first and second years in suit, respectively.

This case is factually unique in that plaintiff has always specialized in exactly the same activity that generated all of its renegotiable revenues for the two years under review, viz, the manufacture and sale to the Government of final drive sprockets used for replacement purposes on such off-highway military vehicles as tanks, tank retrievers, gun carriers and personnel carriers.

Since 1961 plaintiff, a Michigan corporation, has conducted its business in its own plant in Port Huron, Michigan. Theretofore, beginning in approximately 1950, the business was located in rented quarters in Detroit.

The fundamentals of manufacturing a sprocket involve the flame-cutting of its rough configuration out of high carbon steel plate followed by a series of machining operations that are interspersed with various closely controlled applications of heat that are absolutely critical to the production of a sprocket of satisfactory machinability and end-product durability. The proper use and application of heat is the most technically complex aspect of the manufacturing process because it requires both an extensive understanding of .metallurgy and the mechanical engineering skill necessary to accomplish. a precise and efficient introduction of the heat that the metallurgy requires. In both of these areas plaintiff’s president, Mr. Harvey Amoe, had outstanding competence.

The preeminence that plaintiff achieved in its specialty was attributable to the exceptional energy and resourcefulness of Mr. Amoe, who personally controlled all aspects of production and sales, ¡assisted by his wife, Kathryn, who, as secretary-treasurer, assumed full responsibility for all record-keeping and related administrative aspects of the business.

Though there were two dozen or more firms, including such large concerns as Chrysler Corporation, that periodically responded to the Government’s solicitations to supply it replacement sprockets, the evidence indicates that there was no potential supplier other than plaintiff who concentrated exclusively on that product line. That fact, coupled with Mr. Amoe’s intense industry and great technical capability resulted in plaintiff’s invariably being the low responsible bidder and therefore becoming practically the Government’s sole supplier of replacement sprockets during the years under review. In that role, plaintiff delivered a product of consistently 'high quality and, considering the volume demands placed on its productive capacity during the years in suit as a result of Vietnam procurement requirements, did so with commendable punctuality.

Characterizing the fundamental concern of the Renegotiation Act of 1951, 50 U.S.C. App. §§1211-24 (1970), as amended (Supp. II 1972), as being with the reasonableness of prices rather than profits, plaintiff contends that none of its profits can properly be deemed excessive since 'all were earned by furnishing the Government a quality product at consistently lower prices than otherwise obtainable by it. Further, plaintiff points to the Armed Services Procurement Regulations (ASPR) as reinforcing its conception of the central thrust of the Renegotiation Act.

In response, defendant points to the language of the Renegotiation Act, declaring Congressional policy to be the elimination of “excessive profits”, not “unreasonable prices”, and to various expressions in the relevant legislative history to convincingly demonstrate that in the statutory context of renegotiation a price cannot be deemed reasonable if it yields the seller an excessive profit. The referenced ASPR does not impugn the validity of that principle in the area of procurement policy. Its message is just that a price does not become a reasonable one for the Government to pay simply because it is thought to yield the seller only a minimal profit. Total price of the end-product is of course the standard of competition in all markets, including those created by Government demand. Paul v. United States, 371 U.S. 245, 250-253 (1963).

Conceding that plaintiff is due some credit in both of the review years for contribution to the defense effort and in the second review year for efficiency, under the so-called statutory factors dealing with those matters [50 U.S.C. App. § 1213(e) (4)], defendant relies basically on a comparison of plaintiff’s profit performance in the review years with that of the year immediately preceding them to carry its burden of proving the existence and extent of excessive profits. Lykes Bros. S.S. Co. v. United States, 198 Ct. Cl. 312, 327, 330, 459 F. 2d 1393, 1401-1403 (1972).

Understandably, in view of the dramatic profit increase in the review years, but not persuasively, plantiff vigorously attempts to discredit the significance of a contractor’s past performance in gauging the question of excessive profits for a current period. The question, of course, is not whether the permissible amount of a contractor’s present-day profits is to be straitj acketed by his own prior experience but whether that experience is cognizable as a general benchmark from which adjustments appropriate under the various statutory factors are to be made.

Because plaintiff’s operations during the review years are distinguishable from those of its entire previous business history only by substantial differences in volume, the selection of a profile of profit normalcy from that earlier history is particularly apt in this instance.

The Act directs that “In determining excessive profits * * * there shall be taken into consideration * * * [Reasonableness of costs and profits, with particular regard to volume of production, normal earnings, and comparison of war and peacetime products, * * * .” 50 U.S.C. App. § 1213(e)(1). Regarding the relevance of a profitability norm in the contractor’s own prior history, the Board’s interpretive regulation provides: “Comparison will be made with the contractor’s own costs and profits in previous years and with current costs and profits of other contractors, if such information is available.” 32 C.F.R. § 1460.10(b) (1) (1974). Informed observers and practitioners have long recognized the soundness of looking to the contractor’s own prior experience as an indication of the starting point to which should be made those adjustments, designated by statute and regulation, necessary to compensate for such differing functional and economic factors as significantly affect profits in the period under review. Senate Hearings on Sec. 403 of Pub. L. 528 (To Amend Title YII of the Revenue Bill of 1943 — Renegotiation of Contracts) (1943) at 6; N. H. Jacoby & J. F. Weston, Profit Standards for Renegotiation, in PROCUREMENT AND PROFIT RENEGOTIATION, (1960) 121, note 19, at 144.

In his testimony, Mr. Amoe affirmatively identified plaintiff’s fiscal years ended June 30,1963,1964 and 1966 as periods characteristic of normal volume and profits for it. The evidence also shows that, while somewhat more profitable, plaintiff’s fiscal year ended June 30,1965 readily fits into the same pattern of normalcy.

Mrs. Amoe testified that an annual output of 12,000 sprockets would constitute normal volume for plaintiff.

In each of the fiscal years ended June 30, 1963 through June 30, 1966 plaintiff produced 16,094, 15,417, 19,815 and 17,361 sprockets, respectively. Finding 14, infra.

For those years plaintiff’s pre-tax profits averaged 6.01 percent of sales, ranging from a low of 4.21 percent in fiscal 1964 to a high of 7.57 percent in fiscal 1965. Findings 17,19, infra.

In the first review year, fiscal 1967, output rose to 53,616 sprockets, sales to $2,735,328.44 and pre-tax profit accounted for 15.18 percent of sales. Findings 14,17, infra. Thus, dollar volume and profits for that year rose 188 percent and 545 percent, respectively, over the preceding year. '

In the second review year, fiscal 1968, sprocket volume further increased to 58,598 and pre-tax profits to 23.02 percent of sales. Findings 14,17, infra. As contrasted with the 1966 fiscal year, sales increased 295 percent while profits ballooned 1,240 percent.

The evidence is that although plaintiff introduced two major technical innovations during the first review year, both were undergoing trial and error adjustments throughout that year and neither, therefore, served to increase efficiency until the following year. Findings 11-13, infra. In all other respects, manufacturing operations were performed in the first review year in the same manner that they had been throughout at least the three immediately preceding years, if not longer. It appears, therefore, that production was trebled in the first review year by resort to multiple work shifts, not by technological advances that increased efficiency. This is reflected by the fact that plaintiff’s ratio of direct labor cost to sales revenue showed little or no improvement in the first review year as compared with the next three preceding years. Finding 26, infra. Increased volume in that year did, however, yield a significant reduction in the percentage of sales revenue consumed by the burden items of general and administrative expense. Finding 17, infra.

Aside from the effect of increased volume on the unit cost of overhead, the evidence indicates that plaintiff’s pre-tax profits in the first review year were materially benefited by price increases that it was able to obtain on three of the larger and, consequently, higher-priced sprockets in its product line. Finding 25, infra.

In the above circumstances defendant charges that not less than $275,000 of plaintiff’s pre-tax profit of $415,355.83 must be considered excessive. That would leave plaintiff with a pre-tax profit of approximately 5.7 percent of sales — a lesser rate of return than it achieved in each of the two previous years and well below the average of the four preceding years. Finding 17, infra. To support this view defendant attributes virtually none of plaintiff’s profit increase in the first review year to improved efficiency or, except for minimal recognition for contribution to the defense effort, to any other aspect of the so-called statutory factors justifying the retention of additional profits.

Although it has long been recognized that, in general, the Government should receive the major benefit of profits attributable to increased volume resulting from its own demand, the Board’s own interpretive regulations recognize that the principle is subject to various qualifications. For example, 32 C.F.R. § 1460.10 (b) (3) (1974), provides in part:

Favorable consideration will be given to an increase in volume of production for defense purposes. On the other hand, when the Government’s demand has enabled the contractor to increase his sales without exceptional effort and without corresponding increases in costs, decreased unit costs result, and the Government should normally get the principal benefit in more favorable prices, or in renegotiation. [Emphasis added.]

The record is clear that it was only the exceptional effort put forth by Mr. and Mrs. Amoe and plaintiff’s entire work force that enabled it to triple its production in the first review year. There is no suggestion that the performance in that year represented anything less than full realization of the maximum potential of its productive facilities.

Contrary to defendant’s assertion, plaintiff’s performance in the first review year clearly merits the favorable recognition for efficiency that is mandated by the Act. 50 U.S.C. App. § 1213 (e). The Board’s definitive regulation states [32 C.F.K.. § 1460.9(b)]:

Favorable recognition must be given to the contractor’s efficiency in operations, with particular attention to the following:
(1) Quantity of production; for example, in relation to available physical facilities; meeting production schedules * * *; maximum use of available production facilities.
(2) Quality of production; for example, maintenance of standards of quality; rejection record; reported mechanical or other difficulties in the use or installation of the product.
* iji # H* *

Equally apparent on the evidence is the fact that plaintiff is due favorable consideration under 50 U.S.C. App. § 1213 (e) (5) for the technical complexity that is involved in the successful manufacture of sprockets. The demanding requirements for the heat-treatment necessary to properly harden the sprockets in desired areas, but only in these areas, is clearly illustrative of the type of complexity envisioned by this factor. Also involved is the absolute necessity of machining the sprockets to extremely close tolerances. The pertinent Board regulation provides, in part [32 C.F.B.. § 1460.14(b) (1)]:

Consideration will be given to the character of the business of the contractor. The manufacturing contribution will vary with the nature of the product and the degree of skill and precision required in the work performed by the contractor. The relative complexity of the manufacturing technique and the relative integration of the manufacturing process are the basic considerations in evaluating this factor.

The net of the total situation for the first review year is that when assimilated to the relevant statutory criteria, a preponderance of the evidence, including that delineating its own profit experience in times of concededly normal operations, shows that plaintiff did realize some excessive profits. It is equally clear, however, that under the same criteria not all of its profits above 5.7 percent of sales were excessive, as defendant would have it.

The situation is not materially different for the second review year.

Again, unless the Renegotiation Act is deemed inapplicable as a matter of law to contractors who typically produce goods of acceptable quality at prices lower than obtainable elsewhere by the Government, a proposition that is insupportable for reasons previously given, some part of the pretax profit of $862,984.80 earned by plaintiff in its fiscal year ended June 30, 1968 was clearly excessive. The evidence shows that less than $100,000 of that unprecedented profit resulted from reductions in the unit cost of direct labor that presumably were made possible by technological advances perfected by the close of the preceding year. As in the case of the first review year, it appears that price increases obtained by plaintiff on three of the large-type sprockets in its product line were once again primarily responsible for a rate of return on sales that was more than three times greater than that achieved by plaintiff in f.y.e. June 30, 1965, the best year that it ever had prior to the period under review.

"While the technological efficiency factor recognized by defendant for the second review year prompted it to increase the margin of profit to which it agrees plaintiff was entitled, to approximately 9 percent of sales (.rather than 5.7, as in the preceding year), it is apparent that it still failed to accord plaintiff all of the favorable consideration due it under the statutory factors. For example, defendant’s approach to the second review year makes no allowance for the earnings credit due plaintiff for complexity involved in its manufacturing technique. That factor is equally apposite to both of the review years.

In sum, as to both of the years in suit, the record is entirely adequate to permit an intelligible discernment of a basic standard of profit normalcy for plaintiff’s business and to identify those statutory factors entitling it to additional profit allowances for review year operations. The evidence does not, however, provide a tenable basis for separately translating each of the operative factors into a reasonably definite dollar amount. In these circumstances, to invoke the frequently abused expendient of a so-called “jury verdict” to reach a superficially determinate result would be little short of pure sophistry. In its legitimate form a “jury verdict” is not an unqualified license to guess. Old Colony Bondholders v. New York, N. H. & H. R. Co., 161 F. 2d 413, 449-451 (2d Cir.1947) (opinion of Frank, J., dissenting in part). A realistic alternative is provided by the evidence.

Almost half of the sprockets that the Government bought from plaintiff during the two review years, some 43,774 in all, were procured under negotiated contracts that were let because of a lack of bidder interest or of adequate price competition in such bids as were received in response to formal advertising' solicitations. 10 U.S.C. §2304; 32 C.F.B. §§1.300-2,1.300-3 (1974).

As a prerequisite to the issuance of a negotiated contract the ASPR’s provide: “Some form of price or cost analysis is required in connection with every negotiated procurement action.” 32 C.F.R.. § 3.807-2(a) (1974). In advance of each of the negotiated contracts that it received in the review years, therefore, plaintiff submitted a breakdown-type statement of the costs that it expected to incur and the profit that it expected to earn on the contemplated procurement. In these submissions plaintiff variously projected its margin of profit as ranging between 2.45 percent and 5 percent of selling price. On the negotiated contracts as a whole, plaintiff’s projected profit margin averaged well under 3.5 percent of selling price. In the course of performance or afterwards it never qualified or rescinded these representations as to its profit expectations. Although Mr. Amoe consistently denied the Government access to plaintiff’s plant operations for purposes of verifying the accuracy of its cost projections, the increment of profit was never a subject of contention. In fact, evaluating plaintiff’s cost and profit submissions in the process of attempting to arrive at an acceptable unit price to be used for an award, the procurement representatives uniformly disregarded plaintiff’s profit projections in favor of their own conception of a measure of profit that was fair and equitable recompense for the undertaking involved. They uniformly selected 10 percent of total cost as the proper measure of a fair profit. Finding 24, infra. Although the Government was in urgent need of the sprockets covered by the negotiated contracts awarded plaintiff, there is no suggestion in the record that this standard of reasonableness for profits was the product of duress, fraud or mistake, or that for any reason the procuring authority ever, even at trial, came to regard it as excessive.

FINDINGS OF FACT

1. Plaintiff, a Michigan corporation whose plant and offices were located in Port Pluron during the two fiscal years in issue, was formed in 1952 to manufacture and sell a single product line; final drive sprockets for such off-highway military vehicles as tanks, tank retrievers, gun carriers and personnel carriers. Instead of attempting to sell these sprockets to vehicle manufacturers for use as original equipment components, plaintiff has concentrated its efforts on the replacement market in which the U.S. Government is the sole customer.

2. Harvey Amoe, assisted by his wife, Kathryn, founded plaintiff and has been the principal moving force in its subsequent development. Although during the period in suit Mr. Joseph F. Clavenna owned something more than one-third of plaintiff’s stock and served as its vice-president, Mr. and Mrs. Amoe have always held the controlling interest. As plaintiff’s president Mr. Amoe has personally directed all aspects of production and sales thoughout while Mrs. Amoe, serving as secretary-treasurer, assumed full responsibility for all record-keeping and administrative phases of the business.

3. Mr. Amo© is a dynamic and highly individualistic person with a great degree of mechnical skill and inventiveness. He received his technical education, beginning at age 15, from the Henry Ford Trade School where the curriculum consisted of ¡an intensive three-year combination of predominantly technical academics and work experience. After completing that course he served his apprenticeship working for the Ford Motor Co. and ultimately rose to the position of general manager of Quality Tool and Die Co., a Ford subsidiary. He held that job until the early 1940’s when he first went to Port Huron and attempted to establish his own toolmaking business under the name of Gibraltar Machine Co. The effort proved unsuccessful, however, because the area did not have the skilled toolmakers and machinists necessary for such precision work. Mr. Amoe adjusted to this labor situation by changing the format of his business to that of a production shop. Such a business produces particular articles on a job-lot basis in response to the customer’s specifications and quantity requirements. For example, the business made magnetic field rings used as components in the manufacture of electrical generators. ■

4. It was in approximately 1942 that Mr. Amoe first began making final drive sprockets for the military. He did this in the basic capacity of a second-tier subcontractor for Borg-Wamer Co. The opportunity arose when he learned that the Ingerosol Division of Borg-Warner had obtained a Navy contract to build LVT-3 vehicles (landing vehicle, tank). He felt that he had the ‘know-how to make the final drive sprockets for these vehicles but he did not have the capital to finance their production. He therefore contacted Jones & Laughlin Steel Co. and interested that firm in bidding as a subcontractor to furnish the sprockets, Jones & Daughlin to supply the steel and Amoe to perform the fabrication. The arrangement proved mutually satisfactory and continued until military procurement dried up at the end of World War II. There being no further demand for sprockets, Mr. Amoe, turned to making industrial patterns for foundry use. By the late 1940’s it became apparent that pattern-making was not going to generate sufficient earnings to justify continuing the business. Accordingly, the Gibraltar Machine Co. was liquidated. In 1950, after a brief and unsatisfactory experience in the hotel business, Mr. Amoe relocated in Detroit. While there he learned that General Motors’ Cadillac Tank Plant at Cleveland, Ohio, had been awarded a large contract for Bulldog Walker Tanks. He promptly approached Jones & Laughlin, with whom he had earlier associated successfully in the production of sprockets for the LVT-3, to determine whether it would be interested in jointly endeavoring to secure a subcontract for sprockets to be installed on the Walker as original equipment. Jones & Laughlin was receptive but the effort to obtain the business was not successful. Mr. Amoe later learned that a subcontract for the Walker sprockets was let to the Morris Chain Division of Borg-Wamer. Morris Chain, it developed, was unable to perform the subcontract and turned to Jones & Laughlin for assistance because it had heard of the latter’s earlier success in supplying sprockets for the LVT-3s. In turn, Jones & Laughlin referred the Borg-Wamer people to Mr. Amoe as the person who had the necessary technical know-how. They contacted him and attempted to get the benefit of that know-how either by purchasing it outright from him or by enlisting his services as an employee. He flatly rejected these overtures in favor of simply obtaining a subcontract from Morris Chain to produce the sprockets. He persevered and,received the subcontract, which he performed satisfactorily in rented machine shop facilities that he had obtained in the Detroit area. It was at this time that Mr. Amoe first became aware of the potential market for replacement sprockets, a market that would enable him to deal directly with the buyer (the U.S. military) and to thereby be relieved of the frustrations of attempting to secure original equipment subcontracts from the large commercial concerns who held the prime contracts for off-highway military vehicles. He thereafter concentrated on bidding competitively to supply the military’s replacement sprocket needs under fixed price contracts.

5. Inadequate financing handicapped Mr. Amoe’s early efforts at securing replacement sprocket contracts from the Government. For example, his was the low bid on an invitation to supply 20,000 replacement sprockets for the M-47 tank. He did not get the contract, however, because a pre-award investigation disclosed that he was unable to finance acquisition of the necessary steel plate from which the sprockets were to be made. That contract was awarded to the Michigan Stove Co., which elected to perform it through its Metal Fabricating subsidiary. The subsidiary’s plant was located in Detroit, near the rented space occupied by Mr. Amoe. Metal Fabricating experienced considerable difficulty in producing sprockets that met the applicable specifications. When Mr. Amoe learned of this he approached Metal Fabricating and offered to fill the commitment under a subcontract. Though Metal Fabricating attributed its difficulties to faulty material, Mr. Amoe found that the real problem was lack of technical know-how, particularly in the area of the heat treatment required to harden the sprockets in the proper places. He had conceived and built a flame-hardening apparatus by which this could be done properly and much more economically than by alternative means of electric induction hardening equipment. The .result was that Mr. Amoe succeeded in obtaining a subcontract from Metal Fabricating at the same price that he had used in his unsuccessful bid to the Government. While this arrangement was economically satisfactory to Mr. Amoe, he soon found that he was subject to significant end-product inspection difficulties that resulted from skepticism that Metal Fabricating had engendered in Government representatives in the course of its faulty efforts to perform. Although these circumstances caused frustrating inspection delays and considerable inconvenience for Mr. Amoe in completing his subcontract, the extensive contact that he had with Government procurement officials in the course of overcoming the problems that he inherited from Metal Fabricating earned him the lasting confidence and respect of these officials.

6. Plaintiff continued operating in rented quarters in Detroit until 1961 when it purchased an old but adequate plant facility on the 'St. Clair River in Port Huron and relocated there.

7. The finished weight of the various drive sprockets manufactured by plaintiff ranged from 21 pounds to 121 pounds. The sprockets are out out of high carbon steel plate ranging in thickness from 1% to 1% inches and weighing 3,210 pounds. With the end-product yield from that raw material approximating only 33 percent, it is seen that fabrication entails the in-process movement of relatively heavy and cumbersome articles. This factor is important because, in plaintiff’s operation at least, the bulk of the required handling is manual. That fact, coupled with the heat generated by the fabrication process, creates a physically demanding and generally unattractive work environment. Thus, the recruitment and retention of a competent and productive work force has always been a chronic problem for the plaintiff and one that tended to increase in proportion to volume output requirements.

8. The same basic procedures were required for manufacturing all of the sprockets in which plaintiff dealt. They can be summarized as follows:

a. The rough configuration of the sprocket is cut out of a steel plate by acetylene burning.
b. The cut form is heat-treated in order to give it a uniform and proper texture.
c. After surface scale is removed by sandblasting, the center-hole is counterbored and the lug areas drilled and tapped.
d. The tooth-pointing needed to properly engage the sprocket with the driven track is then performed and the tooth contours milled smooth and freed of burrs.
e. The tooth contours, the primary wear areas on the sprocket, are alternately heat-treated and quenched to create requisite hardness there without imparting the same to the teeth themselves. The entire sprocket is then stress-relieved by a uniform application of heat.

9. The evidence uniformly shows that the proper application of heat is the most critical aspect of sprocket manufacture, the object being to achieve necessary machinability and end-product durability without producing the thermal cracking that results from metallic inclusions of oxides and silicates when heat is improperly applied. It was primarily to this general subject that Mr. Amoe referred when he testified that “* * * there are a few items in manufacturing sprockets that are tricks, and it’s very tricky if you don’t know what you’re doing.” The evidence is equally clear that in this and all other respects of sprocket manufacturing, Mr. Amoe knew precisely what should be done and had a very sound and workable approach as to how to do it.

10. In the course of his years of experience in sprocket manufacturing Mr. Amoe developed various innovations that materially increased efficiency and thereby yielded consequent reductions in production time and cost. All but two of these innovations were conceived and perfected prior to 1964.

First, Mr. Amoe modified the feed mechanism on the burning torches used to cut the basic sprocket configuration from steel plate so as to increase the torches’ cutting capacity, thereby reducing the burning time required for each sprocket.

Next, he found that because of the severe impact vibration involved, the old fashioned type of belt-driven lathe was far superior to the modern and more expensive gear-driven lathes for tooth-pointing.

Mr. Amoe developed two concepts that achieved substantial efficiency improvement and cost reduction in the milling of the tooth contour or pocket area of the sprockets. First, he adapted conventional horizontal milling machines in a manner that permitted them to operate with a vertical feed (rather than a longitudinal feed and a cross feed) so that, depending on size, four to eight or nine sprockets could be loaded onto a precision fixture and milled simultaneously. Second, he designed and made a special purpose cutting tool for this operation that had a substantially greater wear life between sharpenings than commercially available tools which were, in addition, more than three times as costly in the first instance. He also modified a standard type of profile grinder so that it could sharpen these in-house cutting tools in approximately one-fifth the time required to sharpen the commercially available tools.

Finally, Mr. Amoe designed and built an apparatus for the critical process of imparting the necessary hardness to the contour area of sprockets while at the same time leaving the core portion of the teeth soft and thereby able to absorb the impact of stones and other hated foreign materials picked up in the track area, without breaking. To accomplish this he devised an electronically controlled device for applying flame heating and quench cooling in carefully controlled cycles that contacted the sprockets at precisely the proper locations. The alternative means of hardening the desired areas of the sprockets involves the use of electric induction hardening machines. Such equipment is extremely costly and far more difficult to operate within the close tolerances needed to confine hardness to the contour area so that none of the teeth become brittle.

11. The two other innovations conceived and perfected by Mr. Amoe were instituted during the period in suit. Both materially increased efficiency.

In the period May-June, 1967, after a period of trial and error that consumed most of a year, Mr. Amoe perfected a hooding technique by which sprockets could be withdrawn from the normalizing furnace while still hot instead of remaining in the furnace until totally cool. Normalizing is essential to remove the stresses that are created in high carbon steel when it is permitted to cool in the open air after being subjected to the burning process by which the rough sprocket form is out out of the steel plate raw material. Before perfection of the hooding technique the capacity of plaintiff’s furnace was limited to one charge of rough cut sprockets per 24 hours. The procedure was to maintain the furnace at 300-400 degrees while it was being loaded with sprockets. After loading was completed the heat was increased to full normalizing temperature and maintained at that level for approximately one hour per inch of sprocket thickness. Thereafter the heat was 'gradually diminished until completely shut off. The sprockets then had to remain in the furnace until the furnace and the entire charge of sprockets in it reverted to approximately normal temperature without exposure to outside air. It was this procedure that consumed 24 hours and since normalizing prior to machining was essential to the manufacture of an acceptable sprocket, this step represented an absolute bottleneck in plaintiff’s operations. Mr. Amoe was able to quadruple the daily sprocket capacity of the furnace by devising a hooding apparatus that permitted withdrawal of the sprockets from the furnace at full normalizing temperature thereby permitting the furnace to be immediately reloaded with a fresh charge of sprockets and also permitting it to operate continuously at high temperature without the necessity for intermittent temperature reduction to permit slow cooling of the normalized sprockets.

The other innovation perfected by Mr. Amoe during the period in suit was the use of Potter & Johnson (P&J) horizontal automatic turret lathes, varying in length from 12 to 18 feet, to counterbore and champfer (remove burrs) the center hole of a sprocket all in a single, fully automatic operation that required only a single tool setting. Prior to the application of this technology these operations were performed separately and the counterboring was done on vertical turret lathes or boring mills that not only operated at a significantly smaller capacity but required a much more skilled operator; for example, one capable of making precise micrometer readings. The P&Js used by plaintiff were equipped with six stations, viz, six separate places where tooling could be applied to the material being machined. A turret, timed with a cam, independently and sequentially approached each of the six separate tooling stations, automatically performed its assigned operation at that station, and then backed off and moved to the next station. The P&Js were also equipped with a cross-slide which permitted the addition of the tooling necessary to concurrently perform the chamfering operation. By replacing the traditional methods of counter-boring and champfering with the P&Js became essentially a loading and monitoring function, since all machining was done automatically by fixed-position tools. This was particularly advantageous to plaintiff because of the extreme shortage of available skilled labor in the Port Huron area.

12. Plaintiff bought its first P&J on March 28, 1966. It bought three more P&Js in April of the same year. Because of material shortages, the electrical work necessary to place these machines in operation required 4-6 weeks. In addition, because of the special-purpose use to which the machines were to be put, it was necessary for plaintiff to make all of the tooling required for them. After this was done and the machines placed in service, the process of eliminating the “bugs” began. Because the technology was new and1 because of the large volume of sprockets that plaintiff was attempting to process with those machines, tool breakage and equipment breakdowns were frequent in the early stages of this operation. At the time the Government’s need for replacement sprockets in Vietnam fully taxed plaintiff’s productive capacity. In order to alleviate down time in the counterboring phase of operations the Government leased three P&Js, that were in new condition, to plaintiff for a reasonable rental fee. At the same time the Government provided plaintiff with some needed drill presses. The Government-furnished P&Js furnished valuable backup assistance until May, 1967, when plaintiff purchased two more P&Js in the commercial market.

13. Mr. Amoe testified that it was not until May, 1967 that all “bugs” had been effectively eliminated from the P&J innovation. He testified that while P&J efficiency gradually improved, beginning in the fall of 1966, it was not until May, 1967 that experience gained from trial and error had rendered the process essentially “bug-free” and fully productive.

14. Plaintiff produced and sold the following quantities of sprockets during each of the fiscal years indicated below:

15. Mrs. Amoe testified that in her opinion a normal year in plaintiff’s business, from the standpoint of annual volume of sprocket output, would be one in which production averaged approximately 1,000 sprockets per month.

16. In response to a question specifically calling for the identification of a period prior to the review years (fiscal years ended June 30, 1967 and June 30, 1968) that plaintiff regarded as normal in the conduct of its business, Mr. Amoe specified the fiscal years ended June 30, 1963 and June 30, 1964 as representing years of normal operations. He later expanded this specification to include its fiscal year ended June 30, 1966. The evidence indicates that plaintiff’s operations for the fiscal year ended June 30, 1965 were equally representative of normalcy for it.

17. For each of the years indicated, plaintiff’s sales, cost of goods sold, general and administrative expense and pretax net profit (expressed both in dollar amount and as a percentage of sales) were as follows:

18.For each, of the years indicated, plaintiff’s opening net worth, and its pre-tax net profit (expressed both in terms of dollar amount and as a percentage of opening net worth) were as follows:

COMPARATIVE STATEMENT OF OPENING NET WORTH AND ANNUAL EARNINGS

19.For the four-year period, fiscal year ended June 30, 1963 through the fiscal year ended June 30, 1966, plaintiff’s average annual sales, cost of goods sold, general and administrative expense and pre-tax net profit (expressed both in dollar amount and as a percentage of sales) were as follows:

STATEMENT OF AVERAGE REVENUES, COSTS AND EARNINGS FOR FISCAL YEAR ENDING JUNE 30, 1963 THRU FISCAL YEAR ENDING JUNE 30, 1966

20.For the two-year period, fiscal year ended June 30, 1963 and fiscal year ended June 30, 1964, plaintiff’s average n.nnna.1 sales, cost of goods sold, general and administrative expense and pre-tax net profit (expressed both in dollar amount and as a percentage of sales) were as follows:

STATEMENT OF AVERAGE REVENUES, COSTS AND EARNINGS FOR FISCAL YEAR ENDING JUNE 30, 1963 AND JUNE 30, 1964

21. For the two-year period, fiscal year ended June 30, 1965 and fiscal year ended June 30, 1968, plaintiff’s average annual sales, cost of goods sold, general and administrative expense and pre-tax profit (expressed both, in dollar amount and as a percentage of sales) were as follows:

STATEMENT OF AVERAGE REVENUES, COSTS AND EARNINGS FOR FISCAL YEAR ENDING JUNE 30, 1965 AND JUNE 30, 1966

22. Prior to the review years, the most profitable year in plaintiff’s history was the fiscal year ended June 30, 1965. The $67,988.62 pre-tax profit that it earned in that year represented a 7.57% return on sales and a 53.57% return on opening net worth. In the fiscal year ended June 30,1967, the first review year, plaintiff’s actual pre-tax profit of $415,-355;83 represented a return of 15.18% on sales and 249.22% on opening net worth. As contrasted with the respective rates of return on sales and net worth achieved for f.y.e. 6/30/65, that profit exceeded 7.57% of f.y.e. 6/30/67 sales by $208,-291.47 and 53.57% of f.y.e. 6/30/67 opening net worth by $326,075.74. For the fiscal year ended June 30, 1968, the second review year, plaintiff’s actual pre-tax profit of $862,984.80 represented a return of 23.02% on sales and 278.41% on opening net worth. As contrasted with the respective rates of return on sales and net worth attained for f.y.e. 6/30/65, that profit exceeded 7.57% of f.y.e. 6/30/68 sales by $579,158.68 and 53.7% of f.y.e. 6/30/68 opening net worth by $696,931.58.

23. Although it appears that throughout the 1960’s, there were at least two dozen firms, including such large ones as the Chrysler Corporation, that held themselves out as manufacturers of the type sprockets in which plaintiff dealt, the evidence is that it was only the plaintiff who concentrated exclusively on that product line. That specialization, combined with the drive, technical competence and inventiveness of Harvey Amoe, placed plaintiff in a preeminent competitive position from the standpoint of costs and efficiency. It was undoubtedly these factors that accounted for the fact that plaintiff was consistently the low bidder for the Government’s replacement sprocket business and, with a single minor exception, its sole supplier of sprockets during the review years.

24. The evidence shows that the profit margins realized by plaintiff on sprocket sales during the review years vastly exceeded those that it projected to the Government when it obtained much of the business that was let on a negotiated basis because of the lack of adequate bidding competition. As earlier noted, plaintiff achieved pre-tax profits of 15.18% and 23.02% on sales in f.y.e. 6/30/67 and 6/30/68, respectively. Finding 16, supra. These profit rates were three to as much as ten times greater than the rate of profit that plaintiff projected to the Government in the Certificates of Cost or Pricing Data that it was required to submit in justification of the unit prices that it proposed for negotiated contracts that were ultimately awarded to it. Specifically, on six negotiated contracts (Nos. DA 20-113-AMC-08522 T, DAA E07-67-C-2225, DA 20-113-AMC-11527 T, DAA E07-67-C-1935, DAA E07-67-C-3112 and DAA E07-67-C-5643) covering 43,774 sprockets delivered during the review years, plaintiff certified that its anticipated margin of profit ranged from 2.46% to 5% of selling price. On the volume involved, the weighted average margin targeted by plaintiff was well under 3.5%. In respect to the cost and pricing figures that it certified to the Government as correct, plaintiff uniformly refused to permit any procurement representatives access to its plant operations when they sought such access in an effort to verify the cost figures that had been submitted to them. Essentially, Mr. Amoe’s view was that the Government had no legitimate concern in these matters so long as plaintiff was supplying it high-quality sprockets at prices less than it could otherwise obtain. It appears that during the review years the Government’s need for these items was so great and plaintiff had proved itself such a reliable supplier that Mr. Amoe was able to successfully resist disclosure of the full details of his business. In evaluating plaintiff’s cost and pricing submissions for purposes of negotiated awards to it, Government representatives invariably disregarded plaintiff’s profit projections and endorsed as fair and equitable a profit margin of 10% on total cost, this in contrast to plaintiff’s projections of substantially less than half that much.

25. The evidence adduced by plaintiff affirmatively showed that during the first of the two review years, f.y.e. 6/30/67, it did not realize any economies in production cost that were attributable to manufacturing technology that had not been fully employed throughout the three preceding years. During those three years annual production averaged 17,531 sprockets. When, on cross-examination, Mr. Amoe was asked to explain the drastic rise in profit margin, as a percentage of sales, from f.y.e. 6/30/66 to 6/30/67 he attributed the increase to added volume, pointing out that whereas plaintiff had produced only 17,361 sprockets in f.y.e. 6/30/66, output rose to 53,616 in f.y.e. 6/30/67.

Aside from considerations of volume, the evidence affirmatively suggests one other source of the drastic profit increase experienced in f.y.e. 6/30/67. That source relates to increased selling prices obtained by plaintiff on three of the types of sprockets included in its product line. Mr. Amoe acknowledged that plaintiff 'had indeed raised prices on the larger sprockets that it supplied the Government. He identified them as bearing ordnance part numbers “691”, “597” and “893”. The evidence shows that price increases on the quantities of these three types of sprockets delivered during f.y.e. 6/30/67 accounted for additional sales ¡revenue of $295,298.30. It appears that this added revenue, coupled with a reduction in the percentage of sales consumed by general and administrative expenses, as a result of greatly increased sprocket volume, largely explains the increase in pre-tax net profit from $64,377.20 in f.y.e. 6/30/66 to $415,355.83 in f.y.e. 6/30/67.

26. For each of the years indicated, plaintiff’s ratio of direct labor cost to sales was as follows:

27. Sprocket volume for the second of the two review years, f.y.e. 6/30/68, was approximately 10% greater than that of the previous one (58,598 v. 53,616). That additional volume served to accentuate the increase in profits resulting from unit cost economies attributable to the two major technological advances that, for the first time, were fully effective in that year; the hooding techniques that quadrupled capacity of the normalizing furnace and the successful adaptation of P&J horizontal turret lathes that yielded a comparable efficiency increase in the counterboring and champfering of sprockets. Finding 11, supra. The significant reduction in direct labor cost as a percentage of sales, reflected in the preceding finding, tangibly attests to the production economies that resulted from the greater efficiency brought about by technological advance. In addition, increased volume resulted in a further reduction (to 3.75%) in the percentage of sales revenues consumed 'by general and administrative expenses.

Finally, the evidence shows that plaintiff’s revenues for f.y.e. 6/30/68 were further augmented by more than $676,000, representing increased prices that it obtained for 32,871 type “691”, “597” and “893” sprockets that it delivered during that year. ú%ííj

28. For purposes of financial comparison with its own operations plaintiff adduced certain statistical materials compiled by Dun and Bradstreet as well as data contained in the Source Book of Statistics of Income, published by the Internal Kevenue Service, U.S. Treasury Department. Information contained therein is of negligible probative value for purposes of comparison with the plaintiff because the evidence does not indicate that the entities on which the data are based are functionally comparable to the plaintiff in terms of operations or markets served.

29. The evidence is convincing that plaintiff exerted exceptional effort to respond to the Government’s critical need for sprockets by taxing its facilities and personnel to the utmost during the two review years. During this entire period plaintiff operated on a three-shift basis, seven days a week. In order to properly oversee that activity Mr. Amoe worked 10-12 hours per day, seven days a week, and Mrs. Amoe regularly worked 8-10 a day, six days a week.

30. Plaintiff’s income tax returns for the review years were audited by the Internal Revenue Service and no exception was taken to the salary deductions, including those pertaining to Mr. and Mrs. Amoe, taken on those returns.

31. During each of the review years plaintiff operated in a highly efficient manner. That efficiency reflected itself favorably in plaintiff’s costs as against those of other bidders on procurement contracts for the same articles.

32. Plaintiff consistently 'delivered a high quality product and, considering the volume of product that it turned out, did so punctually.

33. The manufacturing technique required for the production of acceptable sprockets is relatively complex, particularly so with respect to the necessaiy and proper application of heat treatment.

34. After examination of plaintiff’s operations for the fiscal years ended June 30, 1967 and June 30, 1968 the Renegotiation Board determined that its profits for those years were excessive in the respective amounts of $125,000 and $475,000. These figures reflected salary disallowances not made in this proceeding.

ULTIMATE FINDING OF FACT

The defendant has proved by a preponderance of the evidence that with due regard for efficiency, risk assumption, complexity of manufacturing technique and contribution to the defense effort plaintiff realized excessive profits of $65,000 and $375,000, before allowance for state and federal taxes on income, for the fiscal years ended June 30,1967 and June 30,1968, respectively.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the determination herein, the court concludes as a matter of law that plaintiff realized excessive profits of $65,000 and $375,000, before adjustment for state and credit for federal taxes on income, in its fiscal years ended June 30, 1967 and June 30,1968, respectively. The cause is remanded to the trial division for further proceedings under Rule 131 (c). 
      
       32 C.F.R. § 3.806 (1974) :
      "* * * Cost profit and price relationship».
      
      "(a) Where products are sold In the open market, costs are not necessarily the controlling factor In establishing a particular seller’s price. Similarly where competition may be Ineffective or lacking, estimated costs plus estimated profit are not the only pricing criteria. In some eases, the price appropriately may represent only a part of the seller’s cost and Include no estimate for profit or fee, as in research and development projects where the contractor Is willing to share part of the costs in other cases, price may be controlled by competition as set forth in 5 3.805-1 (a). The objective of the contracting officer shall be to negotiate fair and reasonable prices in which due weight is given to all relevant factors, including those in § 3.101.
      “(b) Profit or fee is only one element of price and normally represents a smaller proportion of the total price than do such other estimated elements as labor and material. While the public Interest requires that excessive profits be avoided, the contracting officer should not become so preoccupied with particular elements of a contractor’s estimate of cost and profits that the most important consideration, the total price itself, is distorted or diminished in its significance. Government procurement is concerned primarily with the reasonableness of the price which the Government ultimately pays, and only secondarily with the eventual cost and profit to the contractor.” (Emphasis added.)
     
      
       50 U.S.C. App. § 1211.
     
      
       H. Rep. No. 7, 82d Cong. 2d Sess., pp. 2, 5; 97 Cong. Rec., Part 1, pp. 593, 594, 607, 1344, 1346, 1437.
     
      
       The record herein contains no evidence of the costs or profits of any other contractor shown to he at all functionally comparable to the plaintiff either before or during the review years.
     
      
       97 Cong. Rec., Part 1, pp. 594, 1324 (1951). C. G. Blough, Renegotiation Standards and Practices, 10 Law and Contemp. Prob., 278, 298 (1943); J. T. Koehler, An Imaginary Renegotiation Case-Soto Statutory factors Are Applied, speech delivered to the American Management Association, 1952, reprinted In The Renegotiation Guide, (1957), 59, 59-60.
     
      
       Finding 9, infra.
      
     
      
       Finding 26, infra.
      
     
      
      
         Findings 11-13, 27, infra.
      
     
      
       Finding 27, infra.
      
     