Activity Based Costing for a Service Company Bounce Back Insurance Company carries three major lines of insurance auto, workers' compensation, and homeowners. The company has prepared the following report: Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 Auto Homeowners Premium revenue Estimated daim Underwriting income Underwriting income as a percent of mium revenue $5,800,000 (4,060,000) $1,740,000 Workers Compensation $6,250,000 (4,375,000) $1,875,000 $5,200,000 (5,740,000) $2.460,000 30 309 JON Hangguniant is concerned that the administrative expenses may make some of the insurance lines un profitable. However, the administrative expenses have not been located to the in lines. The controlleras gested that the administrative expenses could be assigned to the insurance lines using activity based cooting. The distrative expenses are comprised of five activities. The activities and their rates are as follows Activity Rates Activity No processing Cancellation processing Claire oudite Claim dissement processing $110 per new polley 5180 per cancellation 3330 per claim audit 5100 per disbursement Claimsbursements processing Premium collection processing $100 per disbursement $25 per premium collected Activity base use data for each line of insurance were retrieved from the corporate records as follows: Auto Workers Compensation Homeowners Number of new policiers 1,330 1.400 4,100 Number of canceled poldes 490 300 2.200 Number of audited claims 390 110 950 Number of daim disbursements 470 220 850 Number of premium collected 8,500 1.900 15.200 1. Complete the product profitability report through the administrative activities. Determine the operating income as a percent of premium revenue. Rounded to the nearest whole percent. Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers Como Homeowners veu evene X Estimated daim Underwriting income Administrative activities New polic processing Cancellation processing Claimsbursements processing Premium collection processing $100 per disbursement $25 per premium collected Activity base use data for each line of insurance were retrieved from the corporate records as follows: Auto Workers Compensation Homeowners Number of new policiers 1,330 1.400 4,100 Number of canceled poldes 490 300 2.200 Number of audited claims 390 110 950 Number of daim disbursements 470 220 850 Number of premium collected 8,500 1.900 15.200 1. Complete the product profitability report through the administrative activities. Determine the operating income as a percent of premium revenue. Rounded to the nearest whole percent. Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers Como Homeowners veu evene X Estimated daim Underwriting income Administrative activities New polic processing Cancellation processing Estimated daim Underwriting income Administrative activities New policy processing Cancellation processing Claim audits Claim disbursements processing Premium collection processing Total administrative expenses OD DE od Do dondo Operating Income Operating income as a percent of premium revenue 1. Interpret the report All three hunches have porcentage of underwriting income to premium rever. The doces among the insurance lines are in the way they consume activities. The Insurance line has the profitability because it has frequent claims that are more auditing and disbursement processing than do the other two lines. In addition, the Homeowners one has a much higher rate of cancellation relative to the other times as of new polices). Lastly, the Homeowners ne more per collections compared to the other two lines. Pust the momente la collected in smaller amounts from more comes than the other two lines in contrast the line consume the administrative activities, ing it to be very profitable. The Autone is in between these two
