The Insurance Company insures homeowners in three regions of the United States: Eastern, Midwest, and South. In the past year, several hurricanes hit the Southern region of the United States, requiring payments to insured homeowners.

Management of the company wishes to analyze the profitability of the three key regions and has gathered the following information:

In addition to the customer-level costs above, the company also allocates $750,000 of corporate costs to each region based on the revenues of each region.
Required:
1. Prepare a cost-hierarchy income statement for The Insurance Company using the format in Exhibit 14-7 assuming corporate costs are not allocated to each region.
2. Allocate the corporate costs to each region and calculate the income of each region after assigning corporate costs.
3. Should top management of The Insurance Company close down the South region? Explain.
4. What are the advantages and disadvantages of The Insurance Company allocating corporate costs to the regions?

Transcribed Image Text:

Midwest South $4,000,000 $2,600,000 $1,800,000 $8,400,000 2,920,000 ,768,000 ,674,000 6,362,000 $1,080,000 S 832,000 126,000 $2,038,000 Eastern Total Revenue Customer-level costs Customer-level operating income Customer-level operating income percentage 27% 32% 7% 24.26%