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Unavoidable Fixed Cost

An insurance company has the following profitability analysis of its services. There are no services or divisions other than what is stated below:
...................................Life Insurance............Auto Insurance............Home Insurance
Revenues.....................$5,000,000................$10,000,000.................$3,000,000
Commissions................(1,000,000).................(2,000,000)...................(600,000)
Claims/Payments..........(3,000,000).................(7,300,000)..................(2,000,000)
Fixed Costs....................(500,000)....................(500,000)....................(500,000)
Profit..............................$ 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.
Determine next year's profitability for the company if all services with losses are dropped and if all other revenues and expenses remain unchanged from the current year.

Solution Preview

The company's current net profit is $500,000 +$200,000 - $100,000, or $600,000. The company will drop the Home Insurance line, but its fixed costs are unavoidable and distributed evenly, ...

Solution Summary

This solution illustrates the shifting of unavoidable fixed costs by dropping segments.

$2.19