An insurance company has the following profitability analysis of its services: L
ID: 2674562 • Letter: A
Question
An insurance company has the following profitability analysis of its services:Life Insurance Auto Insurance Home Insurance
Revenues $5,000,000 $10,000,000 $3,000,000
Commissions (1,000,000) (2,000,000) (600,000)
Payments (3,000,000) (7,300,000) (2,000,000)
Fixed Cost (500,000) (500,000) (500,000)
Profit $500,000 $200,000 ($100,000)
The fixed costs are distributed equally among the services and are not avoidable if one of the services is dropped.
What is the profitability of the remaining services if all services with losses are dropped?
Explanation / Answer
From the face of profit and loss statement it is evident theat the Home Insurance services are running in the losses So, the Company will drop the home insurance servicesandthen the Profit and loss statement will be as follows.
Particulars Life Insurance Auto Insurance
Revenues $5,000,000 $10,000,000
Commissions (1,000,000) (2,000,000)
Payments (3,000,000) (7,300,000)
Fixed Cost (750,000) (750,000)
Profit $250,000 (50,000)
Now, due to only two types of services the Fixed Cost burden per service has increased resulting into the loss of $50000 for the Auto insurance services.
Again if the company only carries on the Life insurance services the fixed cost will completely be borne by the life insurance services and thus resulting into a Loss of $500000.
If the company carries on all the services it has a combined profit of $600000, If on;y Auto & life insurance services then a Combined profit of $200000 and if only Life Insurance Services than loss of $500000.
So it advisable for the company to carry on all the services as the overall profit is maximum in that case and if any service is dropped there will be loss in other service. So loss in atleast 1 service is inevitable.
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