Activity-Based Costing for a Service CompanySafety First Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report: a. Complete the product profitability report through the administrative activities. Determine the income from operations as a percent of premium revenue, rounded to the nearest whole percent. Enter all amounts as positivenumbers.Safety First Insurance CompanyProduct Profitability ReportFor the Year Ended December 31AutoWorkers' Comp.HomeownersPremium revenueEstimated claimsUnderwriting income$$Administrative activities:New policy processing$4Cancellation processingClaim auditsClaim disbursements processingPremium collection processingTotal administrative expenses$Income from operations$Income from operations as a percent of premium revenue%%%b. Interpret the report.All three insurance lines havepercentage of underwriting income to premium revenue. The differences among the insurance lines are in the way they consumeactivities. Theinsurance line has theprofitability because it hasandfrequent claims that require more auditing and disbursement processing than dothe 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 tothe other two lines. Possibly, the Homeowners line is collected in smaller amounts from more customers than the other two lines. In contrast, theline consumes theadministrativeactivities, causing it to be very profitable. The Auto line is in between these two. Safety First Insurance CompanyProduct Profitability ReportFor the Year Ended December 31Workers'AutoHomeownersCompensationPremium revenue$5,750,000$6,240,000$8,160,000Estimated claims4,312,5004,680,0006,120,000Underwriting income$1,437,500$1,560,000$2,040,000Underwriting income as a percent of25%25%25%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 hassuggested 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:ActivityActivity RatesNew policy processing$120 per new policyCancellation processing$175 per cancellationClaim audits$320 per claim auditClaim disbursements processing$104 per disbursementPremium collection processing$24 per premium collectedActivity-base usage data for each line of insurance wereof insurance were retrieved from the corporate records as follows: retrieved from the corporate records as follows:Workers'AutoHomeownersCompensationNumber of new policies1,3201,5004,080Number of canceled policies4802402,160Number of audited claims385120960Number of claim disbursements480216840Number of premiums collected8,4001,80015,000

Product profitability report is prepared to ascertain the profit on per product basis of the…

Safety First Insurance Company Product Profitability Report For the Year Ended December 31 Workers" Auto Homeowners Compensation Premium revenue $5,750,000 $6,240,000 $8,160,000 Estimated claims 4,312,500 4,680,000 6,120,000 Underwriting income $1,437,500 $1,560,000 $2,040,000 Underwriting income as a percent of 25% 25% 25% premium revenue 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 $120 per new policy Cancellation processing $175 per cancellation Claim audits $320 per claim audit Claim disbursements processing $104 per disbursement Premium collection processing $24 per premium collected Activity-base usage data for each line of insurance wereof insurance were retrieved from the corporate records as follows: retrieved from the corporate records as follows: Workers' Auto Homeowners Compensation Number of new policies 1,320 1,500 4,080 Number of canceled policies 480 240 2,160 Number of audited claims 385 120 960 Number of claim disbursements 480 216 840 Number of premiums collected 8,400 1,800 15,000

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q