Wells Fargo Insurance Services (WFIS) is an insurance brokerage company that clas­sified insurance products as either easy

Wells Fargo Insurance Services (WFIS) is an insurance brokerage company that clas­sified insurance products as either €œeasy€ or €œdifficult.€ 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 allocate the processing and service 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 allocationreport.

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Easy Product Difficult Product $400 280 $120 3096 Total Revenue Processing and service expenses Income from operations Operating income margin $600 420 $180 30% $1,000 700 300 30% Easy Product Difficul Product Total Revenue Processing and service expenses Income from operations Operating income margin $600 183 $417 7096 $400 S17 $(117) (2996) $1,000 700 300 30%