Activity-based costing for a service company OBJ. 5, 6 Safety First Insurance Company carries three major lines of insurance: auto, workers’

compensation, and homeowners. The company has prepared the following report:

Safety First Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers’ Compensation Homeowners Premium revenue $5,750,000 $6,240,000 $8,160,000 Less estimated claims 4,312,500 4,680,000 6,120,000 _________ _________ _________ Underwriting income $1,437,500 $1,560,000 $2,040,000 _________ _________ _________ _________ _________ _________ Underwriting income as a percent of premium revenue 25% 25% 25%

Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity-based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows:

Activity Rates New policy processing $120 per new policy Cancellation processing $175 per cancellation Claim audits $320 per claim audit Claim disbursements processing $104 per disbursement Premium collection processing $24 per premium collected Activity-base usage data for each line of insurance was retrieved from the corporate records and follows:

Workers’

Auto Compensation Homeowners Number of new policies 1,320 1,500 4,080 Number of canceled policies 480 240 2,160 Number of audited claims 385 120 960 Number of claim disbursements 480 216 840 Number of premiums collected 8,400 1,800 15,000

a. Complete the product profitability report through the administrative activities. Determine the income from operations as a percent of premium revenue, rounded to the nearest whole percent.

b. Interpret the report.