Reference no: EM132690684

Problem - Activity-based costing in an insurance company

Safeguard Insurance Company carries three major lines of insurance: auto, workers' compensation, and homeowners. The company has prepared the following report for 2013:

Safeguard Insurance Company Product Profitability Report For the Year Ended December 31, 2013
	Auto	Workers' Compensation	Homeowners
Premium revenue	$4,800,000	$5,200,000	$6,800,000
Less estimated claims	3,360,000	3,640,000	4,760,000
Underwriting income	$1,440,000	$1,560,000	$2,040,000
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 Rates
New policy processing	$150 per new policy
Cancellation processing	$220 per cancellation
Claim audits	$400 per claim audit
Claim disbursements processing	$130 per disbursement
Premium collection processing	$30 per premium collected

Activity-base usage data for each line of insurance was retrieved from the corporate records and is shown below.

	Auto	Workers' Comp.	Homeowners
Number of new policies	1,100	1,250	3,400
Number of canceled policies	400	200	1,800
Number of audited claims	320	100	800
Number of claim disbursements	400	180	700
Number of premiums collected	7,000	1,500	13,000

Required -

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.

b. Interpret the report.