Question

Show Me How Calculator 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: Safety First Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers' Compensation Homedyners Premium revenue $5,750,000 $6,240,000 4,680,000 Estimated claims 4,312,500 58,160,000 6,120,000 $2,040,000 Underwriting income $1,437,500 $1,560,000 Underwriting income as a percent of premium revenue 25% 25% 25% 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:

Answer 1

Answer

B с Auto Workers' Comp Home Owners $5,750,000 $ 6,240,000 $ 8,160,000 $4,312,500 $ 4,680,000 $ 6,120,000 $1,437,500 $ 1,560,000 $ 2,040,000 1 2 Premium revenue 3 Less estimated claims 4 Underwriting income 5 Administrative activities: 6 New policy processing 7 Cancellation processing 8 Claim audits 9 Claim disbursements processing 10 Premium collection processing 11 Total administrative expenses 12 Income from operations 13 Income from operations as a percent of premium revenue $ 158,400 $ $ 84,000 $ $ 123,200 $ $ 49,920 $ $ 201,600 $ $ 617,120 $ $ 820,380 $ 14% 180,000 $ 489,600 42,000 $ 378,000 38,400 $ 307,200 22,464 $ 87,360 43,200 $ 360,000 326,064 $ 1,622,160 1,233,936 $ 417,840 20% 5%

Calculations:

Auto 5750000 4312500 1437500 Workers' Comp Home Owners 6240000 8160000 4680000 6120000 1560000 2040000 1 2 Premium revenue 3 Less estimated claims 4 Underwriting income 5 Administrative activities: 6 New policy processing 7 Cancellation processing 8 Claim audits 9 Claim disbursements processing 10 Premium collection processing 11 Total administrative expenses 12 Income from operations 13 Income from operations as a percent of premium revenue = 120*1320 =120*1500 =120*4080 =175*480 =175*240 =175*2160 =320*385 =320*120 =320*960 =104*480 =104*216 =104*840 =24*8400 =24*1800 =24*15000 =SUM(B6:B10) =SUM(C6:C10) =SUM(D6:010) =B4-B11 =C4-C11 =D4-D11 =B12/B2 =C12/C2 =D12/02

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