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	$87,600
Adjusting claim	379,600
Paying claim	116,800
Total	$584,000

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 7,300 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 75% 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 5% to the "receiving claim" activity cost.

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.

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%

b. Determine the average total process cost per claim payment, assuming 7,300 total claims. Round to the nearest whole dollar. fill in the blank 1 of 1$ per paid claim

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.

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

d. Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 7,300 total claims. Round to the nearest cent. $ per paid claim