Bounce Back Insurance Company carries three major lines of insurance: auto, workers' compensa- tion, and homeowners. The company has prepared the following report: Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 Workers' Compensation $ 6,250,000 (4,375,000) $ 1,875,000 Auto Homeowners $ 5,800,000 (4,060,000) $ 1,740,000 $ 8,200,000 (5,740,000) $ 2,460,000 Premium revenue Estimated claims Underwriting income Underwriting income as a percent of premium revenue 30% 30% 30% 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 Activity Rates $110 per new policy $180 per cancellation $330 per claim audit $100 per disbursement $25 per premium collected New policy processing Cancellation processing Claim audits Claim disbursements processing Premium collection processing Activity-base usage data for each line of insurance were retrieved from the corporate records as follows: Workers' Auto Compensation Homeowners Number of new policies Number of canceled policies 1,330 1,400 4,100 490 300 2,200 Number of audited claims 390 110 950 Number of claim disbursements 470 220 850 Number of premiums collected 8,500 1,900 15,200 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. b. Interpret the report.
Bounce Back Insurance Company carries three major lines of insurance: auto, workers' compensa- tion, and homeowners. The company has prepared the following report: Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 Workers' Compensation $ 6,250,000 (4,375,000) $ 1,875,000 Auto Homeowners $ 5,800,000 (4,060,000) $ 1,740,000 $ 8,200,000 (5,740,000) $ 2,460,000 Premium revenue Estimated claims Underwriting income Underwriting income as a percent of premium revenue 30% 30% 30% 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 Activity Rates $110 per new policy $180 per cancellation $330 per claim audit $100 per disbursement $25 per premium collected New policy processing Cancellation processing Claim audits Claim disbursements processing Premium collection processing Activity-base usage data for each line of insurance were retrieved from the corporate records as follows: Workers' Auto Compensation Homeowners Number of new policies Number of canceled policies 1,330 1,400 4,100 490 300 2,200 Number of audited claims 390 110 950 Number of claim disbursements 470 220 850 Number of premiums collected 8,500 1,900 15,200 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. b. Interpret the report.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Bounce Back Insurance Company carries three major lines of insurance: auto, workers' compensa-
tion, and homeowners. The company has prepared the following report:
Bounce Back Insurance Company
Product Profitability Report
For the Year Ended December 31
Workers' Compensation
$ 6,250,000
(4,375,000)
$ 1,875,000
Auto
Homeowners
$ 5,800,000
(4,060,000)
$ 1,740,000
$ 8,200,000
(5,740,000)
$ 2,460,000
Premium revenue
Estimated claims
Underwriting income
Underwriting income as a percent
of premium revenue
30%
30%
30%
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
Activity Rates
$110 per new policy
$180 per cancellation
$330 per claim audit
$100 per disbursement
$25 per premium collected
New policy processing
Cancellation processing
Claim audits
Claim disbursements processing
Premium collection processing
Activity-base usage data for each line of insurance were retrieved from the corporate records as
follows:
Workers'
Auto
Compensation
Homeowners
Number of new policies
Number of canceled policies
1,330
1,400
4,100
490
300
2,200
Number of audited claims
390
110
950
Number of claim disbursements
470
220
850
Number of premiums collected
8,500
1,900
15,200
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.
b.
Interpret the report.
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