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

FINANCIAL ACCOUNTING
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Chapter1: Financial Statements And Business Decisions
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Activity-Based Costing for a Service Company

Safety 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 positive
numbers.
Safety First Insurance Company
Product Profitability Report
For the Year Ended December 31
Auto
Workers' Comp.
Homeowners
Premium revenue
Estimated claims
Underwriting income
$
$
Administrative activities:
New policy processing
$4
Cancellation processing
Claim audits
Claim disbursements processing
Premium collection processing
Total administrative expenses
$
Income from operations
$
Income from operations as a percent of premium revenue
%
%
%
b. Interpret the report.
All three insurance lines have
percentage of underwriting income to premium revenue. The differences among the insurance lines are in the way they consume
activities. The
insurance line has the
profitability because it has
and
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.
Transcribed Image Text: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 positive numbers. Safety First Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers' Comp. Homeowners Premium revenue Estimated claims Underwriting income $ $ Administrative activities: New policy processing $4 Cancellation processing Claim audits Claim disbursements processing Premium collection processing Total administrative expenses $ Income from operations $ Income from operations as a percent of premium revenue % % % b. Interpret the report. All three insurance lines have percentage of underwriting income to premium revenue. The differences among the insurance lines are in the way they consume activities. The insurance line has the profitability because it has and 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.
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
Transcribed Image Text: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
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