Question: Porter Insurance Company has three lines of insurance: automobile, property and life. The life insurance segment has been losing money for the past five quarters and an analysis of that segment was done. It was discovered that the commission paid to the agent, for the first year the policy is in place, is 55 percent of the first-year premium. The second-year commission is 20 percent and all succeeding years, a commission equal to 5 percent of premiums is paid. No salaries are paid to agents; however, Porter does advertise on television and in magazines. Last year, the advertising expense was $500,000. The loss rate (payout on claims) averages 50 percent. Administrative expenses equal $450,000 per year. Revenue last year was $10,000,000 (premiums). The percentage of policies cancelled at various lengths is as follows: First year in force Second year 65% 25 More than two years in force 10 Experience has shown that if a policy remains in effect for more than two years, it is rarely cancelled. Two alternative plans are being considered, to turn this segment around. Plan 1 requires spending $250,000 on improved customer claim service in hopes that the percentage of policies in effect will take on the following distribution: First year in force Second year 50% 15 More than two years in force 35 Total premiums would remain constant at $10,000,000 and there are no other changes in fixed or variable cost behavior Plan 2 involves dropping the independent agent and commission system and having potential policyholders phone in requests for coverage. Leah estimates that revenue would drop to $7,000,000. Commissions would be zero but administrative expenses would rise by $1,200,000 and advertising (including direct mail solicitation) would increase by $1,000,000. Required: 1. Prepare a variable-costing income statement for last year, for the life insurance segment of Porter Insurance Company. Variable-Costing Income Statement Sales Less: Variable expenses Contribution Margin Less Fixed Expenses Operating income (loss) $ 2. What impact would Plan 1 have on income? Increases segment income by $. 3. What impact would Plan 2 have on income? Increases segment income by $_

Question: Porter Insurance Company has three lines of insurance: automobile, property and life. The life insurance segment has been losing money for the past five quarters and an analysis of that segment was done. It was discovered that the commission paid to the agent, for the first year the policy is in place, is 55 percent of the first-year premium. The second-year commission is 20 percent and all succeeding years, a commission equal to 5 percent of premiums is paid. No salaries are paid to agents; however, Porter does advertise on television and in magazines. Last year, the advertising expense was $500,000. The loss rate (payout on claims) averages 50 percent. Administrative expenses equal $450,000 per year. Revenue last year was $10,000,000 (premiums). The percentage of policies cancelled at various lengths is as follows: First year in force Second year 65% 25 More than two years in force 10 Experience has shown that if a policy remains in effect for more than two years, it is rarely cancelled. Two alternative plans are being considered, to turn this segment around. Plan 1 requires spending $250,000 on improved customer claim service in hopes that the percentage of policies in effect will take on the following distribution: First year in force Second year 50% 15 More than two years in force 35 Total premiums would remain constant at $10,000,000 and there are no other changes in fixed or variable cost behavior Plan 2 involves dropping the independent agent and commission system and having potential policyholders phone in requests for coverage. Leah estimates that revenue would drop to $7,000,000. Commissions would be zero but administrative expenses would rise by $1,200,000 and advertising (including direct mail solicitation) would increase by $1,000,000. Required: 1. Prepare a variable-costing income statement for last year, for the life insurance segment of Porter Insurance Company. Variable-Costing Income Statement Sales Less: Variable expenses Contribution Margin Less Fixed Expenses Operating income (loss) $ 2. What impact would Plan 1 have on income? Increases segment income by $. 3. What impact would Plan 2 have on income? Increases segment income by $_

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter18: Pricing And Profitability Analysis

Section: Chapter Questions

Problem 38P: Porter Insurance Company has three lines of insurance: automobile, property, and life. The life...

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