Second year Prime Insurance Company has three of Insurance automobil, property, and e. 166 Wife Insurance segment has been losing money for the past five quarters, and Leah Harper Prime's controller, has done an analysis of that segment. She has discovered that the commission paid to the agent for the first year the policy is in place is 55 percent of the first year premium. The second-year commission is 20 percent, and all succeeding years a commission equal to 5 percent of premiums is paid. No salaries are paid to agents; however, Prime does advertise on television and in magazines. Last year, the advertising expense was Tk. 500,000. The loss rate (payout on claims) averages 50 percent. Administrative expenses equal Tk 450,000 per year. Revenue last year was Tk. 10,000,000 (premiums). The percentage of policies of various lengths is as follows: First year in force 65% 25 More than two years in force 10 Experience has shown that if a policy remains in effect for more than two years. It is rarely cancelled. Leah is considering two alternative plans to turn this segment around. Plan requires spending Tk. 250,000 on improved customer claim service in hopes that th percentage of policies in effect will take on the following distribution First year in force 50% 15 More than two years in force 35 Total premiums would remain constant at Tk 10,000,000, and there are no other changes fixed or variable cost behavior. Plan 2 involves dropping the independent agent ar commission system and having potential policyholders phone in requests for coverage. Lea estimates that revenue would drop to Tk. 7,000,000. Commissions would be zero, b administrative expenses would rise by Tk. 1.200,000, and advertising (including direct m solicitation) would increase by Tk. 1,000,000 Second year Supreme industries, is preparing to submit a bid for a ball bearings order. Sandeep controle the Bearings Division of Supreme, has asked Rohan, the cost analyst, to prepare the bid determine price, Suoreme's policy is to mark up the full costs of the product by 10 5 Sands tells Rohan that he is keen on winning the bid and that the price he cacuates should competitive Rohan prepares the following costs for the bid Direct materials Tk 400.000 Direct manufacturing labor Overhead costs 100.000 Design and parts administration Tk. 40.000 Productior-order 50,000 Setup 55.000 Materials-handling 65.000 General and administration 90.000 Total overhead costs Full product costs TK 8.00.000 All direct costs and 30 % of overhead costs are incremental costs of the order Sandeep reviews the numbers and says. "Your costs are way too high. You have allocated much overhead costs to this job. You know our fixed overhead is not going to change we this order and manufacture the bearings. Rework your numbers. You have got to make costs lower." Second year Prime Insurance Company has three of Insurance automobil, property, and e. 166 Wife Insurance segment has been losing money for the past five quarters, and Leah Harper Prime's controller, has done an analysis of that segment. She has discovered that the commission paid to the agent for the first year the policy is in place is 55 percent of the first year premium. The second-year commission is 20 percent, and all succeeding years a commission equal to 5 percent of premiums is paid. No salaries are paid to agents; however, Prime does advertise on television and in magazines. Last year, the advertising expense was Tk. 500,000. The loss rate (payout on claims) averages 50 percent. Administrative expenses equal Tk 450,000 per year. Revenue last year was Tk. 10,000,000 (premiums). The percentage of policies of various lengths is as follows: First year in force 65% 25 More than two years in force 10 Experience has shown that if a policy remains in effect for more than two years. It is rarely cancelled. Leah is considering two alternative plans to turn this segment around. Plan requires spending Tk. 250,000 on improved customer claim service in hopes that th percentage of policies in effect will take on the following distribution First year in force 50% 15 More than two years in force 35 Total premiums would remain constant at Tk 10,000,000, and there are no other changes fixed or variable cost behavior. Plan 2 involves dropping the independent agent ar commission system and having potential policyholders phone in requests for coverage. Lea estimates that revenue would drop to Tk. 7,000,000. Commissions would be zero, b administrative expenses would rise by Tk. 1.200,000, and advertising (including direct m solicitation) would increase by Tk. 1,000,000 Second year Supreme industries, is preparing to submit a bid for a ball bearings order. Sandeep controle the Bearings Division of Supreme, has asked Rohan, the cost analyst, to prepare the bid determine price, Suoreme's policy is to mark up the full costs of the product by 10 5 Sands tells Rohan that he is keen on winning the bid and that the price he cacuates should competitive Rohan prepares the following costs for the bid Direct materials Tk 400.000 Direct manufacturing labor Overhead costs 100.000 Design and parts administration Tk. 40.000 Productior-order 50,000 Setup 55.000 Materials-handling 65.000 General and administration 90.000 Total overhead costs Full product costs TK 8.00.000 All direct costs and 30 % of overhead costs are incremental costs of the order Sandeep reviews the numbers and says. "Your costs are way too high. You have allocated much overhead costs to this job. You know our fixed overhead is not going to change we this order and manufacture the bearings. Rework your numbers. You have got to make costs lower