Question
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
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:
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.
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 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started