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 31Premium revenueEstimated claimsUnderwriting incomeUnderwriting income as a percent of premium revenueWorkers'AutoCompensation Homeowners$5,800,000$6,250,000 $8,200,000(4,060,000) (4,375,000) (5,740,000)$1,740,000 $1,875,000 $2,460,00030%30%30%Management is concerned that the administrative expenses may make some of the insurance lines unprofitable. However, the administrative expenses have not beenallocated to the insurance lines. The controller has suggested that the administrative expenses could be assigned to the insurance lines using activity-based costing. Theadministrative expenses are comprised of five activities. The activities and their rates are as follows:ActivityNew policy processingCancellation processingClaim auditsClaim disbursements processingPremium collection processingActivity Rates$60 per new policy$100 per cancellation$250 per claim audit$80 per disbursement$20 per premium collectedActivity-base usage data for each line of insurance were retrieved from the corporate records as follows:AutoWorkers'CompensationHomeownersNumber of new policies2,0001,4004,100Number of canceled policies4903002,200Number of audited claims.390110950Number of claim disbursements470220850Number of premiums collected8,5001,90015,200a. Complete the product profitability report through the administrative activities. Determine the operating income as a percent of premium revenue. Rounded to thenearest whole percent.DescriptionPremium revenueEstimated claimsUnderwriting incomeAdministrative activities:New policy processingCancellation processingClaim auditsClaim disbursements processingFive-Stars Insurance CompanyProduct Profitability ReportFor the Year Ended December 31AutoWorkers' Comp. HomeownersPremium collection processingTotal administrative expensesOperating incomeOperating income as a percent of premium revenue%%%b. Interpret the report.All three insurance lines haveconsumeactivities. Thepercentage of underwriting income to premium revenue. The differences among the insurance lines are in the way theyinsurance line has theprofitability 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 policles). Lastly, the Homeowners line has more premium collections compared to the other twolines. Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, theadministrative activities, causing it to be very profitable. The Auto line is in between these two.line consumes the

Profitability analysis is a component of enterprise planning which allows to forecast profitability…

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. Description Premium revenue Estimated claims Underwriting income Administrative activities: New policy processing Cancellation processing Claim audits Claim disbursements processing Premium collection processing Total administrative expenses Operating income Five-Stars Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers' Comp. Homeowners B Operating income as a percent of premium revenue b. Interpret the report. % % % All three insurance lines have consume activities. The percentage of underwriting income to premium revenue. The differences among the insurance lines are in the way insurance line has the profitability because it has a frequent claims that require more auditing and disbursement processing than do the other two lines. In addition, the Homeowners line has a muc higher 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 t lines. Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, the administrative activities, causing it to be very profitable. The Auto line is in between these two. line consume

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q