11. Activity-Based Costing for a Service Company

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
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	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 wereof insurance were retrieved from the corporate records as follows: retrieved from the corporate records as follows:

	Auto			Workers' 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

Question Content Area

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. Enter all amounts as positive numbers.

Safety First Insurance Company Product Profitability Report For the Year Ended December 31

	Auto	Workers' Comp.	Homeowners
Premium revenue	$fill in the blank 7137600aefab014_1	$fill in the blank 7137600aefab014_2	$fill in the blank 7137600aefab014_3
Estimated claims	fill in the blank 7137600aefab014_4	fill in the blank 7137600aefab014_5	fill in the blank 7137600aefab014_6
Underwriting income	$fill in the blank 7137600aefab014_7	$fill in the blank 7137600aefab014_8	$fill in the blank 7137600aefab014_9
Administrative activities:
New policy processing	$fill in the blank 7137600aefab014_10	$fill in the blank 7137600aefab014_11	$fill in the blank 7137600aefab014_12
Cancellation processing	fill in the blank 7137600aefab014_13	fill in the blank 7137600aefab014_14	fill in the blank 7137600aefab014_15
Claim audits	fill in the blank 7137600aefab014_16	fill in the blank 7137600aefab014_17	fill in the blank 7137600aefab014_18
Claim disbursements processing	fill in the blank 7137600aefab014_19	fill in the blank 7137600aefab014_20	fill in the blank 7137600aefab014_21
Premium collection processing	fill in the blank 7137600aefab014_22	fill in the blank 7137600aefab014_23	fill in the blank 7137600aefab014_24
Total administrative expenses	$fill in the blank 7137600aefab014_25	$fill in the blank 7137600aefab014_26	$fill in the blank 7137600aefab014_27
Income from operations	$fill in the blank 7137600aefab014_28	$fill in the blank 7137600aefab014_29	$fill in the blank 7137600aefab014_30
Income from operations as a percent of premium revenue	fill in the blank 7137600aefab014_31%	fill in the blank 7137600aefab014_32%	fill in the blank 7137600aefab014_33%