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Your Insurance Firm Processes

The insurance firm has two facilities - a high-tech facility that handles 10,000 claims per month with $100,000 in fixed costs and $100,000 in variable costs, and a low-tech facility that handles 2,000 claims with $16,000 in fixed costs and $24,000 in variable costs. If claims are expected to decrease, workers should be laid off from the low-tech facility because it has higher variable costs per claim ($12) than the high-tech facility ($10).

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439 views1 page

Your Insurance Firm Processes

The insurance firm has two facilities - a high-tech facility that handles 10,000 claims per month with $100,000 in fixed costs and $100,000 in variable costs, and a low-tech facility that handles 2,000 claims with $16,000 in fixed costs and $24,000 in variable costs. If claims are expected to decrease, workers should be laid off from the low-tech facility because it has higher variable costs per claim ($12) than the high-tech facility ($10).

Uploaded by

rogealyn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Your insurance firm processes claims through its newer, larger high-tech facility and its

older, smaller low-tech facility. Each month, the high-tech facility handles 10,000 claims,
incurs $100,000 in fixed costs and $100,000 in variable costs. Each month, the low-tech
facility handles 2,000 claims, incurs $16,000 in fixed costs and $24,000 in variable costs. IF
you anticipate a decrease in the number of claims, where will you lay off workers?

Answer:

FC = Fixed Cost, VC = Variable Cost, TC = Total Cost

Facility No. of Claims FC VC VC per Claim1 TC per Claim2


High-tech 10,000 $100,00 $100,00 $10 $20
0 0
Low-tech 2,000 $16,000 $24,000 $12 $20

1
VC per Claim Calculation:

m
High-tech = VC/ No. of Claims

er as
= $100,000/10,000

co
= $10

eH w
o.
Low-tech = VC/ No. of Claims rs e
= $24,000/2,000
ou urc
= $12
2
TC per Claim Calculation:
o

High-tech = (FC+VC)/ No. of Claims


aC s

= ($100,000+$100,000)/10,000
v i y re

= $200,000/10,000
= $20

Low-tech = (FC+VC)/ No. of Claims


ed d

= ($16,000+$24,000)/2,000
ar stu

= $40,000/2,000
= $20
sh is

If in case, the expected number of claims are to decrease, then firm must lay off employees
from low-tech facility and must make use of hi-tech facility. Total costs incurred remains the
Th

same for both the facilities, fixed cost is not dependent on number of claims unlike variable
costs. Fixed costs do not change with any fluctuation in the number of claims. In this case
variable cost per unit of low tech facility is higher than hi-tech facilities which add more
burdens. Thus, high-tech facility has to be used which has lower variable costs when
compared to low-tech facility and this will reduce the overall costs.

This study source was downloaded by 100000833311173 from CourseHero.com on 10-07-2021 01:37:40 GMT -05:00

https://www.coursehero.com/file/11546023/Insurance-Problem/
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