Nation Narrow Assurance Company provides both automobile and life insurance to i

Question

Nation Narrow 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 9,600,000 Contribution margin ........................... 490,000 2,400,000 Fixed costs ................................... 600,000 700,000 Net income/loss ............................... <110,000> 1,700,000 The president of the company is considerimg dropping the automobile insurance product line. However, some policyholder prefer having their auto and life insurance with the same company, so if automobile insurance is dropped, sale of life insurance will drop by 10%. Assume that $100,000 of the fixed costs assigned to automobile insurance are unavoidable and thus will continue whether or not automobile insurance is dropped. Calculate the decrease in company profits if the automobile insurance product line is dropped..

Explanation / Answer

After automobile insurance product line is dropped: Life insurance product: Sales revenue: (1200000 x 0.9) = $10800000 Variable cost: (9600000 x 0.9) = $8640000 Contribution margin = $2160000 Fixed cost = 100000 + 700000 = $800000 Net Profit = 2160000 - 800000 = $1360000 Original overall profit of the company before dropping automobile insurance: 1700000 - 110000 = $1590000 After dropping profit: $1360000 Decrease in company profit = 1590000 - 1360000 = $230000 Hope this helps!

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