Gibson Insurance Harvard Case Solution & Analysis

Gibson Insurance Case Solution

Gibson Company was based in Kansas City, Missouri. Gibson Insurance’s key products include financial products, i.e. life insurance and annuities. The policies were directly sold by the in-house agents. The Gibson’s management was focused on the corporate acquisition strategy in order to grow the customer base as well as the overall assets, under the company’s management. The company had been using a simple costing method for the allocation of its product’s support costs. The controller (Rebecca Hampton) felt that the simple costing had been working well historically, however, it did not reflect the actual claim over the resources made by the several business units and product lines.

Moreover, it is observed that despite an increased level of sales; the company’s profitability levels had declined. The company’s management was concerned about finding the key issues related to the incorrect pricing or out of control costs. The company’s controller was sure that a new cost allocation approach would help the company in improving its pricing strategy, whichwould lead towards a better resource’s allocation. The new costing method would enable the company to identify perform the divisions and to determine better product line costs, so that the company’s competitive position could be maintained.

The new cost allocation method is suggested to be activity based costing, whereby the costs are compiled and assigned to the activities based on their relevant activity drivers, unlike the simple costing method, which assigns the cost based on a single cost driver (i.e. number of policies initially). The new allocation bases included the policy acquisition, customer service, sales and marketing and other corporate overhead costs.

The unit support costs have been calculated using the new allocation bases (i.e. steps, calls, contacts and AUM) for all the four support costs. The total number of policies are multiplied with their relevant cost bases, on the basis of which cost drivers are calculated. The aggregate costs related to each cost pool is then divided by the cost drivers, which has resulted in the per units cost of $42.2 (policy acquisition), 44.06 (customer service), 10.02 (Sales & Marketing) and 0.003 (AUM).

Afterwards the cost per policy is calculated by multiplying the cost per unit with the driver use, for the new and in-force annuities and life insurances. The cost per new annuity and life insurance policy are calculated as: $221.52 and $438.22, respectively, while, the cost per in-force annuity and life insurance policy are calculated as $23.73 and $37.02. These costs per policy are used to determine the total cost for the three division i.e. $4,038,341, $4,781,457 and $5,100,202 for Midwest, Gibson and Compton, respectively.

The quantitative analysis shows that the simple costing method was not appropriate for the company as it lead towards the higher level of fluctuations in the total cost for each subdivision. The Midwest division had a high cost through simple cost allocation method; however, the activity based costing resulted in a lower cost. Similarly, the cost for Gibson was slightly less through the activity based costing method. However, the Gibson’s cost was much lower through simple costing method (as shown by graph).

The analysis concludes that the company should adjust its costs according to activity based costing method, as it gives more accurate costs related to each subdivision. Furthermore, the company is recommended to increase its policy prices for the Midwest and Gibson divisions and to lower the prices for the Compton division. These cost adjustments and price change would enable the company to remain competitive in the industry and to keep the operations smooth, efficient and productive..........................

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