LOP Calculation

8/2/2019 LOP Calculation

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Ist step

Calculate gross profit ratio:-

As the starting point of this procedure you have to determine the value of gross profit because loss of

profit is easy to calculate by multiplying Gross profit with short of sale in that disturbance period .

Net profit xxxx

(+) Insured standing Charges of last year xxxx

-------------------------------------

Gross profit of last year xxxx

-------------------------------------

Gross profit ratio = Gross profit / sale of last year X 100

2nd step

Calculate shortage in sale due to loss of fire

Actual sale of same period of loss xxxx

Add any increase in the end of sale (+) xxxx

------------------------------------------------

xxxxx

Less actual sale in dislocation period (-) xxxx

--------------------------------------------------

Shortage of sale in dislocation period xxxx

==================================

3rd step

Calculation of loss of profit

Loss of profit = shortage of sale X G.P. rate / 100


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4th Step

Total amount for claim of loss of profit

Loss of gross profit xxxx

Add increase in cost of working (+) xxxx

---------------------------------------------

xxxx

Less saving in standing charges

---------------------------------------------

Amount of claim xxxx

===================================

5th step

Apply average clause

Amount of claim = policy value / amount to be insured

Important notes

1. We will use of only less rate from following rates for calculating correct amount of loss pf profit

Net profit + Insured standing charges of last accounting year

-------------------------------------------------------------------------- X 100

Sale for the last accounting year

Or

Policy value / sale of 12 months immediately proceeding fire as adjusted for trend .


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2. The Indemnity period or dislocation period which will small, that period will be fixed for calculation of

claim .

3. We will calculate loss of sale on the base of future trend of sale.

4. Insured standing charges means all expenses which are mentioned in the policy of loss of profit.

Businessman wants to get these expenses in the case of mishappening. We can make its list

Traveling expenses

Rent, rate and taxes not related with profit of business

Advertising

Interest on debentures and loans.

Auditors fee

Salaries of permanent staff

Directors fee

Salaries of permanent staff

Wages of skilled workers

All not described expenses must not more than 5% of described standing expenses .

Explanation with example

From the following information, find out the claim under loss of profit policy :-

2007 net profit for the year $ 10000

2007- Standing charges insured $ 6000

$ sales for 2007 $ 160000

Date of fire 1.1.2008

Period of dislocation 3 months

Sales from 1.12007 to 31.3.2007 $ 54000

Sales from 1.1.2008 to 31.3.2008 $ 19400

Indemnity period 6 months

Policy subject to average clause $ 11000

Trend in annual sales 10% increase

Solution


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Ist step

Calculation of gross profit ratio

Net profit + Insured standing charges of last yea

----------------------------------------------------------- X 100

Sale of last year

10000+6000

---------------------- X 100

160000

= 10%

2nd step

Shortage of sale

Last years sale from 1.12007 to 31.3.2007 $ 54000

Add 10% for upward trend $ 5400---------------------------------------------------

$ 59400

Less actual sale during dislocation period $ 19400-----------------------------------------------------

Shortage of sale $ 40000=====================================

3rd step

Calculate of loss of profit

Loss of sale X G.P. rate /100

40000 X 10/100 = 4000

4th step

Total amount for claim of loss of profit

Loss of gross profit 4000

Add increase in cost of working (+) nil

Less saving in standing charges nil

Amount of claim $4000

5th step

Average clause


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Since the policy is subject to average clause, it is necessary to find out whether expected profit of the

current year was fully insured or not .

Expected sale for current year

Last year sale $ 160000

Add :Increase in current year 10% = $ 16000--------------------------------------------

Total sale of current year = 176000---------------------------------------------

Profit rate 10%

The profit of current year = 176000 X 10% = $17600

But we take the policy of $ 11000

This is a case of under insurance. It means insurance company pays $ 110 of every $ 176 loss

Claim = insurance policy / insurable profit X profit lost

= 11000 / 17600 X 4000 = $ 2500

So , amount of claim would be $ 2500

Documents

LOP Calculation