Reference no: EM131224109
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 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 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 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.
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