Question

In: Accounting

Veritime Assurance Company provides both automobile and life insurance to its customers. Income statements for the...

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.

Solutions

Expert Solution

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

ekkarill92 answered 2 years ago
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