Process Activity Analysis for a Service Company

Statewide 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:

Line Item Description Amount

Receiving claim $$57,600$

Adjusting claim $172,800$

Paying claim $57,600$

Total $$288,000$

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 $4,800$ 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 $$1,000$ would not be adjusted but would be accepted upon the insured's evidence of claim. Claims above $$1,000$ would be adjusted. It is estimated that $65\%$ 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 $15\%$ to the "receiving claim" activity cost.

Question Content Area

a$.$ Develop a table showing the percent of individual activity cost to the total process cost. Round the percents to the nearest whole number, if required.

Statewide Insurance Company

Individual activity cost to the total process cost

Activity Cost Percent of

Total Process

Receiving claim $Receiving claim Receiving claim$\%$

Adjusting claim Adjusting claim Adjusting claim$\%$

Paying claim Paying claim Paying claim$\%$

Total $Total Total$\%$

Question Content Area

b$.$ Determine the average total process cost per claim payment, assuming $4,800$ total claims. Round to the nearest whole dollar.

fill in the blank $1$ of $1$$ per paid claim

Question Content Area

c$.$ Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. Round to one decimal place, if required. If an amount is zero, leave the entry box blank. Use the minus sign to indicate an additional cost in the last column.

Statewide Insurance Company

Changes in the activity costs

Activities Activity Cost Prior

to Improvement Activity Cost

After Improvement Activity Cost

Saving

Receiving claim $Receiving claim $Receiving claim $Receiving claim

Adjusting claim Adjusting claim Adjusting claim Adjusting claim

Paying claim Paying claim Paying claim Paying claim

Totals $Totals $Totals $Totals

Question Content Area

d$.$ Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for $4,800$ total claims. Round to the nearest cent.

fill in the blank $1$ of $1$$ per paid claim