Gibson Insurance summary by JennNicole


									                                                                             Jennifer Smith

                                 Case study #3: Gibson Insurance

       Gibson Insurance mainly sells annuities and life insurance. Gibson possesses two

subsidiary companies, Midwest and Compton, which sell the same products with

different price structures and features. Both subsidiaries rely on Gibson to provides

administrative supports. Previously, Gibson’s original method of allocation did not reflect

the real cost of activities. Additionally, when the sales volume had increased, the

profitability declined.

       Management is looking for a better solution for solving pricing and support costs

allocation. Hampton, the new support cost allocation information helps Gibson Insurance

establish better pricing guidelines for the various annuities and life insurance products

sold by each business.

       1) The new allocation offers more accurate information. Management can allocate

       costs more rational by using support activities.

       2) The result of support cost by policy reveals that different policy involves

       different level of working procedures. As a result, the support cost for new

       policies is greater than in-force policies in general. Thus, managers should have

       different pricing strategy as a better assessment.

       3) The total support cost comparison, for companies Midwest and Gibson, is

       lower than in the original method; in contrast, Compton’s support costs of new

       method is greater than in the original method. That is because Compton sold the

       highest cases of life insurance than other companies. The support costs of life
       insurance policies increase significantly from $82.25 to $438.22. Compton needed

       to adopt a new pricing method for each product line, especially for life insurance.

       They also can adjust their sales strategy, focusing more on those that consume

       less support costs.

       Tracking cost expenses would allow management to figure out the productivity

with an unbiased measurement. In operations, company units such as the human

resources and others who are not engaged in market share or generating revenues, but

rather contribute their capabilities for internal supports and help sales department turn

profits to the company. Those efforts are a part of product costs and also are a norm for

performance evaluation. Managers need to know how many services are provided from

each division and how much they are costing. By tracking the resources usage across

projects, managers can control product costs and evaluate personnel performance.

       In general, a corporation’s final goal is to capture the maximum profit for a

company. One way for gaining profits is to raise sales revenues from external. Another

way is saving costs from internal and performing the best teamwork effect. By using cost

center approach, managers can estimate how much would be needed by project and how

much revenues they generate.

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