Workers$$AutoCompensation HomeownersPremium revenue$$5,800,000$$$6,250,000$$$8,200,000$Estimated claims$(4,060,000)(4,375,000)(5,740,000)$Underwriting income$$1,740,000$$$1,875,000$$$2,460,00030\%30\%30\%$Activity$-$Based Costing for a Service CompanyFive$-$Stars Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report:Five$-$Stars Insurance CompanyProduct Profitability ReportFor the Year Ended December $31$Underwriting income as a percent of premium revenueManagement is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not been allocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity$-$based costing. The administrative expenses are comprised of five activities. The activities and their rates are as follows:Activity$-$base usage data for each line of insurance were retrieved from the corporate records as follows:Workers'a. Complete the product profitability report through the administrative activities. Determine the operating income as a percent of premium revenue. Rounded to the nearest whole percent.Five$-$Stars Insurance CompanyProduct Profitability ReportFor the Year Ended December $31$AutoWorkers' Comp.HomeownersActivityActivity RatesNew policy processing$$60$ per new policyCancellation processing$$100$ per cancellationClaim audits$$250$ per claim auditClaim disbursements processing$$80$ per disbursementPremium collection processing$$20$ per premium collectedAutoCompensationHomeownersNumber of new policies$2,0001,4004,100$Number of canceled policies$4903002,200$Number of audited claims$390110950$Number of claim disbursements$470220850$Number of premiums collected$8,5001,90015,200$DescriptionPremium revenueEstimated claimsUnderwriting incomeAdministrative activities:New policy processingCancellation processingClaim auditsclaim disbursements processingPremium collection processingTotal administrative expensesOperating income$\%$Operating income as a percent of premium revenueb. Interpret the report.All three insurance lines have consumepercentage of underwriting income to premium revenue. The differences among the insurance lines are in the way theyactivities. TheY insurance line has the profitability because it hasandfrequent claims that require more auditing and disbursement processing than do the other two lines. In addition, the Homeowners line has a muchhigher rate of cancellation relative to the other two lines $($over $50\%$ of new policies$).$ Lastly, the Homeowners line has more premium collections compared to the other two lines, Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, theline consumes theadministrative activities, causing it to be very profitable. The Auto line is in between these two.