Reproduction cost definition
/What is Reproduction Cost?
Reproduction cost is the expenditure required to reproduce an asset at current prices. The level of reproduction is assumed to be exact - involving the same materials and specifications as were used for the original asset. The concept is used in the insurance industry to assist in determining the price to charge to insure against the destruction of a customer's asset.
The Difference Between Reproduction Cost and Replacement Cost
Reproduction cost differs from replacement cost, which pertains to the cost of an asset that can provide the same functionality as the original asset without necessarily replicating its features. Replacement cost can be lower than reproduction cost, since the replacement concept allows for more variation in possible outcomes.
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Example of Reproduction Cost
A church in central Iowa was built in the mid-1800s by an exceptional architect who employed the flying buttress style of the Notre Dame cathedral in Paris - but the entire church is made of wood. It incorporates many of the unique features of a European church, including carved gargoyles and stained glass windows that use leaded glass. In the current year, a passing tornado clips the church, destroying roughly 25% of the structure.
The local diocese contacts the insurance company for a damage assessment, and to determine the cost of repairs. The reproduction cost could be massive, since it would involve bringing in woodcarvers and maintaining them on-site for two years while they replicate the destroyed church features, as well as glazers to replace some of the windows. This cost is estimated to be $6 million. Alternatively, the insurer calculates that a reasonable replacement that employs modern fixtures, off-the-shelf stained glass and modern steel buttressing would cost $1.5 million.
In short, there is a massive difference between the reproduction and replacement costs of the damaged portions of the church. The insurance policy does not cover the full reproduction cost of the church, so the diocese is forced to accept the replacement cost reimbursement instead, which means that the church will have to be rebuilt using modern replacements.