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		Workers' Compensation		Homeowners
Premium revenue	$5,800,000		$6,250,000		$8,200,000
Estimated claims	(4,060,000)		(4,375,000)		(5,740,000)
Underwriting income	$1,740,000		$1,875,000		$2,460,000
Underwriting income as a percent of premium revenue	30%		30%		30%

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: