Paul operates a sporting goods store. Below are his projected sales and expense
ID: 2663157 • Letter: P
Question
Paul operates a sporting goods store. Below are his projected sales and expense information for the upcoming year and the same information for the year just ending (current year).Current Projected
Sales $400,000. $450,000
Cost of Goods Sold $250,000 $280,000
Expenses $125,000. $130,000
Discuss the issues involved in selecting the proper amount of business income insurance and with consideration for only the information provided determine the maximum probable loss if Paul is shut down for 6 months
Explanation / Answer
Current Year : Paul's net income and continuing operating expenses = 400,000-250,000 = 150,000 So for a 50% Coinsurance coverage, Paul needs to purchase a coinsurance of 50% of 150000 = $75000 So if Paul is Shut down for 6 months & has even Sales pattern during the year, we can say that his Net Inco & Continuing operation expenses will be (6/12)*Insured expenses = 0.5*150000 = 75000 1. Required amount of insurance : $75,000 ($150,000 multiplied by .50 or 50%) 2. Policy limit : $75,000 3. Item 2 divided by item 1 : 1.0 ($75,000 divided by $75,000) 4. Actual loss amount : $75,000 5. Penalty factor : 1.0 (as determined in step 3) 6. Amount paid : $75,000 ($75,000 multiplied by 1.0) Projected case : Current Year : Paul's net income and continuing operating expenses = 450,000-280,000 = 170,000 So for a 50% Coinsurance coverage, Paul needs to purchase a coinsurance of 50% of 170000 = $85000. However Paul has coinsurance of $75000 as he had bought itlast year. So if Paul is Shut down for 6 months & has even Sales pattern during the year, we can say that his Net Inco & Continuing operation expenses will be (6/12)*Insured expenses = 0.5*170000 = 85000 1. Required amount of insurance : $85,000 ($170,000 multiplied by .50 or 50%) 2. Policy limit : $75,000 3. Item 2 divided by item 1 : 0.88 ($75,000 divided by $85,000) 4. Actual loss amount : $85,000 5. Penalty factor : 0.88 (as determined in step 3) 6. Amount paid : $74,800 ($85,000 multiplied by 0.88) SO if Paul is shutdown for 6 months, He will get $74,800 against his claim of $85000