Obj.7 E10-25 Activity-based costing in an insurance company Umbrella Insurance Company carries three major lines of insurance: auto, workers' com- pensation, and homeowners. The company has prepared the following report for 2012: Va. Auto, $1,440.500 UMBRELLA INSURANCE COMPANY Product Profitability Report For the Year Ended December 31, 2012 Workers' Auto Compensation Homeowners Premium revenue $ 7.200,000 $ 6,500,000 $ 9,200,000 Less estimated claims 15,040,000) 14,550,000) 16,440,000) Underwriting income $ 2.160,000 $ 1,950,000 $ 2.760,000 Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allo- cated 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 Rates New policy processing $160 per new policy Cancellation processing $240 per cancellation Claim audits $500 per claim audit $120 per disbursement Claim disbursements processing Premium collection processing S 25 per premium collected Activity-base usage data for each line of insurance were retrieved from the corporate records and are shown below. Auto 1,500 350 320 400 7,500 Number of new policies Number of canceled policies Number of audited claims Number of claim disbursements Number of premiums collected Workers' Comp. 1,450 250 100 180 1,500 Homeowners 4,100 2,000 700 750 12,000 a. Complete the product profitability report through the administrative activities. b. Determine the underwriting income as a percent of premium revenue. c. Determine the operating income as a percent of premium revenue, rounded to one decimal place. d. Interpret the report