Question

In: Accounting

Consider Ms. Tomlins who pays $1,500 in auto insurance premiums for the year. Assume that she 
...

Consider Ms. Tomlins who pays $1,500 in auto insurance premiums for the year. Assume that she 
is in accident and the insurance company has to pay $35,000 to cover liability and repair the car. The insurance company expects to pay a total of $750,000 in claims for the year with respect to the group of policy owners of which this individual is a member. Business expenses for the year are 175,000. Investment earnings on premium received are $35,000. How many insurance policies must the insurance company sell to break even (that is, to earn $0 in profit)? Assume that all policies are sold for a $1,500 premium . Show your work

Solutions

Expert Solution

Sol. Break even point is the sale point where the business has zeo profit & zero loss.

In the given case, Total expenses = 750,000 (Total amount of claims to be paid incl. of Ms. Tomlins) + 175,000 (Business Expenses) - 35000 (Investment Income)

= $ 890,000

No. of policies to be sold = Total Expenses / Premium per policy

= 890,000 / 1500

= 593.33 policies or 594 policies

ekkarill92 answered 2 years ago
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