Continental Insurance Company has a process for making payments on insurance claims as follows: Receiving...
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Continental Insurance Company has a process for making payments on insurance claims as follows: Receiving Claim Adjusting Claim Paying Claim An activity analysis revealed that the cost of these activities was as follows: 1 Receiving claim 2 Adjusting claim 3 Paying claim $78,200.00 183,600.00 8,200.00 $340,000.00 4 Total This process includes only the cost of processing the claim payments, not the actual amount of the claim payments. The adjusting activity involves verifying and estimating the amount of the claim and is variable to the number of claims adjusted. The process received, adjusted, and paid 3,400 claims during the period. All claims were treated identically in this process. To improve the cost of this process, management has determined that claims should be segregated into two categories: claims under $1,000 and claims greater than $1,000. Claims under $1,000 would not be adjusted but would be accepted upon the insured's evidence of claim. Claims above $1,000 would be adjusted. It is estimated that 60% of the claims are under $1,000 and would thus be paid without adjustment. It is also estimated that the additional effort to segregate claims would add 10% to the "receiving claim" activity cost
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