Gibson Insurance Company has tasked Rebecca Hampton, the controller, with reviewing the company's allocation of corporate support costs in order to better assign the cost attributed to product lines and business units. This is important because it would help to provide better information for pricing decisions, sales compensation, and focus on areas in cost improvement. Gibson sells two categories of financial products: annuities and life insurance. They are both sold by in-house sales agents. Gibson decided to start purchasing other corporations in order to quickly grow the company’s customer base and its assets under management (AUM). GIC acquired Compton Insurance Services and Midwest Mutual Insurance Company, and although they all sold the same services, the prices and features were different. Gibson had a decision to make: keep the new acquisitions as separate legal entities, or completely absorb them into its corporate system. GIC chose to keep them as separate legal entities, and treat them as wholly owned subsidiaries for legal and financial reporting purposes. Rebecca decided to re-evaluate the cost allocation structure. She chose to list them under 4 categories: Policy Acquisition, Customer Service, Sales and Marketing, and Corporate Overhead.
All Relevant Issues
Gibson Insurance main issue is its cost allocation system that allocates support costs to its various product lines based on total number of policies. This provided for an inadequate application of resources for each business unit and product line. For example, selling a new policy takes more resources and effort than maintaining an in-force policy. Another concern is a decline in profitability although the sales volumes are increasing. This is possibly due to hidden cost problems or incorrectly set prices. After a breakdown of support cost, Gibson also had a issue with possible inefficiency of processes. Hampton felt as though they used to many resources with selling new policies.
Relationships Among Important Issues
GIC’s current cost allocation system provides for a inadequate allocation of cost. With the true costs for each division and product line mis represented Gibson is unable to accurate set prices to match expenses of products. This also does not allow them to identify problem areas, or inefficient processes, in need of attention. With those two issues secretly effecting the books, GIC profitability has suffered.
Relationships of Case Issues to Aim of the Company
Gibson’s poor cost allocation and lost in profits has it wanting to develop a new allocation method. With this new method they will be able to more accurately apply resource cost and pricing to specific business units and products. After implementing the new drivers they will be able to streamline processes to lower costs. Making these changes will allow Gibson to get to gain control of costs and by affect its profitability.
New Problem Statement Resulting from Case Analysis
Gibson is concerned about its current allocation of corporate support costs. Currently it feels the resources of various business units are not properly assigned. Rebecca Hampton, the controller, must come up with a new allocation method to obtain a better handle on profitability, product pricing and agent compensation, and current costs.
Objectives – verifying the old or developing new based on analysis
Gibson Insurance main objective is to improve profitability. Its second objective is to better control pricing and resource allocation. To control pricing and resources, Gibson third objective is to develop a new cost allocation method based on different cost drivers. Finally Gibson aims to streamline its processes in the future to further lower cost to increase profit.
Statement of Alternatives
After analyzing the case we have come up with five possible alternatives for Gibson Insurance company. First, Gibson can choose to use the new cost drivers,...