Bounce Back Insurance Company carries three major lines of insurance: auto, workers’ compensation, and homeowners. The company has prepared the following report:

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:

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.

b. Interpret the report.

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Bounce Back Insurance Company Product Profitability Report For the Year Ended December 31 Auto Workers' Compensation Homeowners Premium revenue Estimated claims Underwriting income Underwriting income as a percent of premium revenue $ 5,800,000 (4,060,000) $ 6,250,000 (4,375,000) $ 8,200,000 (5,740,000) $ 2,460,000 $ 1,740,000 $ 1,875,000 30% 30% 30% Workers' Compensation Auto Homeowners Number of new policies Number of canceled policies Number of audited claims Number of claim disbursements Number of premiums collected 1,330 490 4,100 1,400 300 2,200 390 110 950 470 220 1,900 850 8,500 15,200