Continental Insurance Company has a process for making payments on insurance claims as follows:

An activity analysis revealed that the cost of these activities was as follows:

1	Receiving claim	$45,900.00
2	Adjusting claim	178,200.00
3	Paying claim	45,900.00
4	Total	$270,000.00

This process includes only the cost of processing the claim payments, not the actual amount of the claim payments. The adjusting activity involves verifying and estimating the amount of the claim and is variable to the number of claims adjusted.

The process received, adjusted, and paid 3,000 claims during the period. All claims were treated identically in this process.

To improve the cost of this process, management has determined that claims should be segregated into two categories: claims under $1,000 and claims greater than $1,000. Claims under $1,000 would not be adjusted but would be accepted upon the insureds evidence of claim. Claims above $1,000 would be adjusted. It is estimated that 60% of the claims are under $1,000 and would thus be paid without adjustment. It is also estimated that the additional effort to segregate claims would add 20% to the receiving claim activity cost.

	Required:
A.	Develop a table showing the percent of individual activity cost to the total process cost.
B.	Determine the average total process cost per claim payment, assuming 3,000 total claims.
C.	Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter "0".
D.	Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 3,000 total claims.

A. Develop a table showing the percent of individual activity cost to the total process cost.

Continental Insurance Company

Individual Activity Cost as a Percentage of Total Process Cost

1	Activity	Cost	Percent of Total Process
2	Receiving claims	$45,900.00
3	Adjusting claim	178,200.00
4	Paying claim	45,900.00
5	Total	$270,000.00

B. Determine the average total process cost per claim payment, assuming 3,000 total claims.

per paid claim

C. Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If an amount is zero, enter "0".

Continental Insurance Company

Changes in Activity Costs

1	Activity	Activity Cost Prior to Improvement	Activity Cost After Improvement	Activity Cost Savings (Cost)
2	Receiving claims	$45,900.00
3	Adjusting claim	178,200.00
4	Paying claim	45,900.00
5	Total	$270,000.00

D. Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 3,000 total claims.

per paid clai