Question

Activity-Based Costing for a Service Company

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 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	$	$	$
Cancellation processing
Claim audits
Claim disbursements processing
Premium collection processing
Total administrative expenses	$	$	$
Operating income	$	$	$
Operating income as a percent of premium revenue	%	%	%

Answer 1

Answer-a)-

BOUNCE BACK INSURANCE COMPANY
CUSTOMER PROFITABILITY REPORT
FOR THE YEAR ENDED DECEMBER 31
PARTICULARS	AUTO	WORKERS' COMPENSATION	HOMEOWNERS
	$	$	$
Premium revenue (a)	5800000	6250000	8200000
Less- Estimated claims	4060000	4375000	5740000
Underwriting income	1740000	1875000	2460000
Less- Administrative activities
New policy processing	$110 per new policy*1330 policies =146300	$110 per new policy*1400 policies =154000	$110 per new policy*4100 policies =451000
Cancellation processing	$180 per cancellation*490 cancelled policies =88200	$180 per cancellation*300 cancelled policies =54000	$180 per cancellation*2200 cancelled policies =396000
Claim audits	$330 per claim audit*390 audited claims =128700	$330 per claim audit*110 audited claims =36300	$330 per claim audit*950 audited claims =313500
Claim disbursements processing	$100 per disbursement*470 claim disbursements =47000	$100 per disbursement*220 claim disbursements =22000	$100 per disbursement*850 claim disbursements =85000
Premium collection processing	$25 per premium collected*8500 collected =212500	$25 per premium collected*1900 collected =47500	$25 per premium collected*15200 collected =380000
Total administrative expenses	622700	313800	1625500
Operating income (b)	1117300	1561200	834500
Operating income as a percent of premium revenue (c=b/a)	19%	25%	10%