Veritime Assurance Company provides both automobile and life insurance to its cu
ID: 2406634 • Letter: V
Question
Veritime Assurance Company provides both automobile and life insurance to its customers. Income statements for the two products for the most recent year appear below: Automobile Insurance Life Insurance Sales revenue ................ $4,000,000 $12,000,000 Variable costs ................ 3,510,000 10,200,000 Contribution margin ........... 490,000 1,800,000 Fixed costs ................... 600,000 700,000 Net income/loss ............... <110,000> 1,100,000 The president of the company is considering dropping the automobile insurance product line. However, some policyholders prefer having their auto and life insurance with the same company, so if automobile insurance is dropped, sales of life insurance will drop by 15%. Assume that $150,000 of the fixed costs assigned to automobile insurance are unavoidable and thus will continue whether or not automobile insurance is dropped. Calculate the amount of the decrease in company profits if the automobile insurance product line is dropped. Do not put a minus sign in front of your answer.
Explanation / Answer
Answer
sales revenue (12000000 * 0.9 ) = 10800000
variable costs ( 10200000 * 0.9 ) = 9180000
contribution margin = 1620000
fixed cost (150000+700000) = 850000
net profit ( 1620000 - 850000) = 770000
original overall profit of the company before dropping insurance = 1100000 - 110000
= 990000
after dropping profit = 770000
company profit = 990000 - 770000
= 220000
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