Question

In our amusement park that we built this week, the ride Diablo’s Domain had revenue of $250,000,000 in its first year as expected. The company paid $750,000 for insurance or $3 for every $1,000 in revenue. If the park is wildly successful and revenue increases by 25% in the second year and the rate of $3 for every $1,000 holds true, how much would it pay for insurance? Do you think it’s reasonable for insurance costs to increase proportionally? Why or why not?

Answer 1

The amount to be paid for insurance will be $ 937,500. In this context, it is reasonable that insurance costs increase proportionally, as the ride will have a greater use and, therefore, a greater exposure to risk.

Explanation:

Given that the amusement park Diablo's Domain ride generated $ 250,000,000 in revenue, and the company paid $ 750,000 in insurance for that game ($ 3 for every $ 1,000 in profit), to determine the amount of insurance that should be paid if the winnings increase by 25% and the same proportion of 3/1000 to be paid is maintained, the following calculation must be made:

(250,000,000 x 1.25) x (3/1000) = X

312,500,000 x 0.003 = X

937,500 = X

Therefore, the amount to be paid for insurance will be $ 937,500.