Suppose There Are Two Types of People in an Insurance

question 5

Essay

Suppose there are two types of people in an insurance market: high and low risks.The high-risk person is sick 10% of the time and the low-risk person is sick 5% of the time.The probability of any individual being high risk is 40%.Upon getting sick,an individual loses $10,000 in medical expenses.What if the individuals do not know their type?

Appreciate the role of cost drivers in the allocation of support department costs.

Grasp the essential features and limitations of activity-based costing (ABC) and other overhead application methods.

Comprehend the significance of selecting appropriate cost drivers for accurate product cost calculation.

Understand the basics and relevance of cost allocation methods in accounting.

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Definitions:

Job Costing Approach

A system used to assign manufacturing costs to an individual product or batches of products, commonly used in industries where products are distinct like construction or custom manufacturing.

Selling Price Per Unit

The amount charged to the customer for a single unit of product or service.

Contribution Margin

A financial metric that represents the difference between a company's sales revenue and variable costs, used to cover fixed costs and profits.

Fixed Costs

Costs that do not fluctuate with the level of production or sales within a certain range, such as rent, salaries, and insurance premiums.