Bounce Back Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report: Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers' Compensation Homeowners Premium 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 $2,460,000 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 New policy processing $110 per new policy Cancellation processing $180 per cancellation Claim audits $330 per claim audit Claim disbursements processing $100 per disbursement Premium collection processing $25 per premium collected Activity-base usage data for each line of insurance were retrieved from the corporate records as follows: Auto Workers' Compensation Homeowners Number of new policies 1,330 1,400 4,100 Number of canceled policies 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. Bounce Back Insurance CompanyProduct Profitability ReportFor the Year Ended December 31

FINANCIAL ACCOUNTING

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Chapter1: Financial Statements And Business Decisions

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Bounce Back Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report:

Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31
	Auto		Workers' Compensation	Homeowners
Premium 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	$2,460,000
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
New policy processing	$110 per new policy
Cancellation processing	$180 per cancellation
Claim audits	$330 per claim audit
Claim disbursements processing	$100 per disbursement
Premium collection processing	$25 per premium collected

Activity-base usage data for each line of insurance were retrieved from the corporate records as follows:

	Auto		Workers' Compensation		Homeowners
Number of new policies		1,330		1,400		4,100
Number of canceled policies		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.

Bounce Back Insurance CompanyProduct Profitability ReportFor the Year Ended December 31

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
Operating income as a percent of premium revenue
b. Interpret the report.
All three insurance lines have
For the Year Ended December 31
consume
$
$
Auto
%
Workers' Comp.
%
Homeowners
$
%
percentage of underwriting income to premium revenue. The differences among the insurance lines are in the way they
insurance line has the
and
profitability because it has
activities. The
frequent claims that require more auditing and disbursement processing than do the other two lines. In addition, the Homeowners line has a much 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 two lines. Possibly,
the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, the
line consumes the
administrative activities, causing it to be very profitable. The Auto line is in between these two.

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