Wells Fargo insurance Services (WFIS) is an insurance brokerage company that classified insurance products as either “easy” or “difficult”. Easy and difficult products were defined as follows:

Easy: Electronic claims, few inquiries, mature product

Difficult: Paper claims, complex claims to process, many inquiries, a new product with complex options

The company originally allocated processing and service expenses on the basis of revenue. Under this traditional allocation approach, the product profitability report revealed the following:

WFIS decided to use activity-based costing to allocated the processing and services expenses. The following activity-based costing analysis of the same data illustrates a much different profit picture for the two types of products.

Explain why the activity-based profitability report reveals different information from the traditional sales allocation report.

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Easy Product Difficult Product Total Revenue Processing and service expenses Income from operations Operating income margin $1,000 700 S600 420 $400 280 $180 $120 $ 300 30% 30% 30%