Question
Umbrella Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report for 20Y2: Umbrella Insurance
Umbrella Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report for 20Y2:
Umbrella Insurance Company | |||||||
Product Profitability Report | |||||||
For the Year Ended December 31, 20Y2 | |||||||
Auto | Workers' Compensation | Homeowners | |||||
Premium revenue | $ 7,200,000 | $ 6,500,000 | $ 9,200,000 | ||||
Less estimated claims | (5,040,000) | (4,550,000) | (6,440,000) | ||||
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 allocated 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 |
Claim disbursements processing | $120 per disbursement |
Premium collection processing | $25 per premium collected |
Activity-base usage data for each line of insurance were retrieved from the corporate records and are shown below.
Auto | Workers' Comp. | Homeowners | |||||||
Number of new policies | 1,500 | 1,450 | 4,100 | ||||||
Number of canceled policies | 350 | 250 | 2,000 | ||||||
Number of audited claims | 320 | 100 | 700 | ||||||
Number of claim disbursements | 400 | 180 | 750 | ||||||
Number of premiums collected | 7,500 | 1,500 | 12,000 |
a. Complete the product profitability report through the administrative activities.
Umbrella Insurance Company | |||
Product Profitability Report | |||
For the Year Ended December 31, 20Y2 | |||
Auto | Workers' Comp. | Homeowners | |
Premium revenue | $7,200,000 | $6,500,000 | $9,200,000 |
Less estimated claims | (5,040,000) | (4,550,000) | (6,440,000) |
Underwriting income | $2,160,000 | $1,950,000 | $2,760,000 |
Administrative activities: | |||
New policy processing | $fill in the blank 897d3b05afde053_1 | $fill in the blank 897d3b05afde053_2 | $fill in the blank 897d3b05afde053_3 |
Cancellation processing | fill in the blank 897d3b05afde053_4 | fill in the blank 897d3b05afde053_5 | fill in the blank 897d3b05afde053_6 |
Claim audits | fill in the blank 897d3b05afde053_7 | fill in the blank 897d3b05afde053_8 | fill in the blank 897d3b05afde053_9 |
Claim disbursements processing | fill in the blank 897d3b05afde053_10 | fill in the blank 897d3b05afde053_11 | fill in the blank 897d3b05afde053_12 |
Premium collection processing | fill in the blank 897d3b05afde053_13 | fill in the blank 897d3b05afde053_14 | fill in the blank 897d3b05afde053_15 |
Total administrative expenses | $fill in the blank 897d3b05afde053_16 | $fill in the blank 897d3b05afde053_17 | $fill in the blank 897d3b05afde053_18 |
Operating income | $fill in the blank 897d3b05afde053_19 | $fill in the blank 897d3b05afde053_20 | $fill in the blank 897d3b05afde053_21 |
Feedback
a. Underwriting income less administrative expenses is equal to income from operations.
b. Determine the underwriting income as a percent of premium revenue.
Auto | fill in the blank d667a105bfac065_1 % |
Workers' Comp. | fill in the blank d667a105bfac065_2 % |
Homeowners | fill in the blank d667a105bfac065_3 % |
c. Determine the operating income as a percent of premium revenue, rounded to one decimal place.
Auto | fill in the blank d667a105bfac065_4 % |
Workers' Comp. | fill in the blank d667a105bfac065_5 % |
Homeowners | fill in the blank d667a105bfac065_6 % |
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