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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