A Firm Wishes to Buy Fire Insurance at Its Plant

question 92

Multiple Choice

A firm wishes to buy fire insurance at its plant.The loss in case of fire is estimated to be $50 million and the probability of occurrence is 0.5% over the next year.If claims are paid at the end of the year and the annual risk-free rate is 10%,compute the insurance premium.

• A)$250,303
• B)$236,109
• C)$245,368
• D)$227,273
• E)$260,154

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Definitions:

Materials Account

An account used to track the cost of raw materials that are bought and used during production processes.

Debit

An accounting entry that results in either an increase in assets or a decrease in liabilities on a company’s balance sheet.

Labour Efficiency Variance

The difference between the actual hours worked and the standard hours allowed for the work performed, often used to assess workforce productivity.

Material Price Variance

The difference between the actual cost of materials and the expected (standard) cost, multiplied by the quantity of materials purchased.