Real-Life Math -- Solution
You must estimate how much your client will pay to reinsure his restaurant with insurance on contents, earnings and liability. Here are your calculations.
Start by calculating how much the content insurance will cost.
The restaurant has about $89,000 in contents. You figure that the insurance company will charge $0.50 per every $100 of contents.
$89,000 / 100 = $890
$890 x 0.5 = $445
It will cost the client about $445 a year to insure the contents.
Since insurance companies only insure earnings on gross earnings, you need to figure out the amount of gross sales a year. Subtract the cost of food and overhead from the total sales.
total sales - overhead = gross sales
$335,000 - $100,500 = $234,500
You estimate that the insurance company will charge about $0.20 per $100 to insure the earnings.
$234,500 / 100 = $2,345
$2,345 x 0.20 = $469
It will cost him about $469 to insure the earnings.
Now, liability. It will cost $2 per $1,000 sales. The client has $335,000 in total sales. You have to calculate this insurance on total sales because he is at risk for all the food he sells.
$335,000 / 1000 = $335
$335 x $2 = $670
It will cost your customer about $670 for liability insurance.
Now, total the 3 types of insurance to figure out how much the whole package would cost.
Contents: $445
Earnings: $469
Liability: $670
Total: $1,584
He will have to pay about $1,584 for the insurance package.
"Good math skills are essential," says David Creighton Sr., an insurance agent. "You have to have an understanding of how money works, of compounds, estimation. There's not a dramatic amount of algebra or trigonometry but you have to understand the basics."