Allstate Insurance Co. and USAA are two well-known insurers of motorists. Allstate has agents and offices all over the country. USAA sells only through the mail and over the telephone or Internet. In addition to offering collision and liability coverage for automobiles, each company offers life insurance and homeowners’ insurance. When a motorist buys auto insurance from Allstate, the agent generally offers life insurance and homeowners’ insurance as well—a strategy that helps increase Allstate’s profitability. Although USAA usually sells its policies at lower prices than Allstate does, it is a very profitable company.

Identify and discuss the role that fixed costs, sales mix, and contribution margin can play in increasing profitability. Suggest a performance measure that could be used to evaluate agents who sell auto insurance. What is the role of variable costs? What is it about the relationship of USAA’s fixed and variable costs that allows the company to sell policies at lower prices than Allstate and yet remain profitable?