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 (+) Insured standing Charges of last year ------------------------------------Gross profit of last year ------------------------------------Gross profit ratio = Gross profit / sale of last year X 100 xxxx xxxx xxxx

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

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3rd step

Calculation of loss of profit

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

4th Step

Total amount for claim of loss of profit

Loss of gross profit Add increase in cost of working (+) --------------------------------------------xxxx Less saving in standing charges --------------------------------------------Amount of claim xxxx

xxxx xxxx

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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 .

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

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

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