Activity-Based Costing for a Service Company

Five-Stars Insurance Company carries three major lines of insurance: auto, workers compensation, and homeowners. The company has prepared the following report:

Five-Stars Insurance Company Product Profitability Report For the Year Ended December 31

Line Item Description	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:

Activity	Activity Rates
New policy processing	$60 per new policy
Cancellation processing	$100 per cancellation
Claim audits	$250 per claim audit
Claim disbursements processing	$80 per disbursement
Premium collection processing	$20 per premium collected

Activity-base usage data for each line of insurance were retrieved from the corporate records as follows:

Line Item Description	Auto	Workers' Compensation	Homeowners
Number of new policies	2,000	1,400	4,100
Number of canceled policies	490	300	2,200
Number of audited claims	390	110	950
Number of claim disbursements	470	220	850
Number of premiums collected	8,500	1,900	15,200

Question Content Area

a. 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.

Five-Stars Insurance Company Product Profitability Report For the Year Ended December 31

Description	Auto	Workers' Comp.	Homeowners
Premium revenue
Estimated claims
Underwriting income
ADMINISTRATIVE ACTIVITIES:
New policy processing
Cancellation processing
Claim audits
Claim disbursements processing
Premium collection processing
Total administrative expenses
Operating income
Operating income as a percent of premium revenue