The Horizon Insurance Agency PDF

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The Horizon Insurance Agency Case Study...

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For the exclusive use of A. Moore, 2021.

UV0021 Rev. Feb. 14, 2011

THE HORIZON INSURANCE AGENCY

Horizon Insurance (HI) was a full-service regional insurance agency located in Albuquerque, New Mexico. To date, HI had done all the printing and publishing of its own promotional brochures, newsletters, informational pamphlets, and required regulatory reports. Linda Wolfe, the business manager of the agency, had for some time thought that the firm might save money and get equally good service by contracting the publishing work to any one of the three or four specialty firms operating in the greater Albuquerque area. After several inquiries, she approached a firm specializing in such work, G-Art Inc., and asked for a quote. At the same time, she asked Bob Myer, her controller, to prepare an up-to-date statement of the cost of operating Horizon’s publishing department. Within a few days, the quote from G-Art Inc. arrived. The firm was prepared to provide all the required publications work for $410,000 a year with the contract running for a guaranteed term of four years with annual renewals thereafter. If the estimated number or assumed mix of publications changed in any given year beyond the baseline planning estimates, the contract price would be adjusted accordingly. Wolfe compared G-Art’s quote with the internal cost figures prepared by Myer (Table 1). Table 1. Annual cost of operating HI’s publications department: Myer’s figures. Materials Labor Department overhead Manager’s salary Allocated cost of office space Depreciation of equipment Other expenses (travel, education, etc.)

Share of company administrative overhead Total cost of department for year

$ 40,000 $290,000 $ 48,000 $10,000 $32,500 $25,000 $115,500 $445,500 $ 30,000 $475,500

This case was prepared by Professor Mark E. Haskins. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. This case is an adaptation of “Liquid Chemical Company—Revised” (UVA-C-0880) by Professor William Rotch. Copyright  1998 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

This document is authorized for use only by Amy Moore in ACCT 6001 - 2020 taught by Mac Gaulin, University of Utah from Dec 2020 to Jun 2021.

For the exclusive use of A. Moore, 2021.

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Wolfe’s initial conclusion was to close Horizon’s publications department and immediately sign the contract offered by G-Art. However, she felt it prudent to give the manager of the department, George Richards, an opportunity to question that tentative conclusion. She called him in and put the facts before him, while at the same time making it clear that Richards’ own job at the agency was not in jeopardy, because even if his department was closed, there was a search currently under way for a manager to fill an open position. Richards could be moved to that position without any loss of pay. Richards agreed to review the data and to think the matter over. The next morning, when they met again, he raised a number of considerations that he felt ought to be borne in mind before his department was closed: For instance, what will you do with the customized graphic design and printing equipment? It cost $260,000 four years ago, but you’d be lucky if you got $80,000 for it now, even though we had planned on using it for another four years at least. And then there is the sizeable supply of print materials that includes a lot of specialized ink, specialty card stock, paper, envelopes, etc. We bought the custom supplies a year ago when we were pretty flush with cash. At that time it cost us about $125,000 and at the rate we are using it now, it will last us another four years. We used up about one-fifth of it last year. As best as I can tell, Myer’s figure of $40,000 for materials includes about $25,000 for these customized supplies and $15,000 for generic supplies we use on a regular basis. If we were to buy these custom supplies today it would probably cost us 110% of what we paid. But, if we try to sell it, we would probably get only 60% of what we paid for it. Wolfe thought that Myer ought to be present during this discussion. She called him in and put Richards’s points to him. Myer said: I don’t much like all this conjecture. I think my figures are pretty conclusive. Besides, if we are going to have all this talk about “what will happen if,” don’t forget the problem of space we’re faced with. We’re paying $12,000 a year in outside office space. If we close Richards’s department, we could use the freed-up space as office space and not need to rent it on the outside. Wolfe replied: That’s a good point, though I must say I’m a bit worried about the people if we close the publications department. I don’t think we can find room for any of them elsewhere in the firm. I could see whether G-Art can take any of them, but some of them are getting older. There’s Walters and Hines, for example. They’ve been with us since they left school 40 years ago, and I think their contract requires us to give them a total severance payoff of about $60,000 each, payable in equal amounts over four years.

This document is authorized for use only by Amy Moore in ACCT 6001 - 2020 taught by Mac Gaulin, University of Utah from Dec 2020 to Jun 2021.

For the exclusive use of A. Moore, 2021.

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Richards showed some relief at this. “But I still don’t like Myer’s figures,” he said. “What about the $30,000 for general administrative overhead. You surely don’t expect to fire anyone in the corporate office if I’m closed, do you?” “Probably not,” said Myer, “but someone has to pay for those costs. We can’t ignore them when we look at an individual department, because if we do that with each department in turn, we will convince ourselves that accountants, lawyers, vice presidents, and the like don’t have to be paid for. And they do, believe me.” “Well, I think we’ve thrashed this out pretty fully,” said Wolfe. “I’ve told G-Art that I’d let them know my decision within a week. I’ll let you know what I decide to do before I write to them.”

Required 1. Assuming no additional financial information can be readily obtained, what action should be taken? To the extent necessary, support your decision by completing the attached worksheet (Exhibit 1). 2. What, if any, additional financial information do you think is necessary for Wolfe to make a sound decision? 3. What, if any, additional nonfinancial information do you think is necessary for Wolfe to make a sound decision?

This document is authorized for use only by Amy Moore in ACCT 6001 - 2020 taught by Mac Gaulin, University of Utah from Dec 2020 to Jun 2021.

For the exclusive use of A. Moore, 2021.

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Exhibit 1 THE HORIZON INSURANCE AGENCY Worksheet

Myer’s Figures

Material: generic supplies

$ 15,000

custom supplies

25,000

Labor: wages

Total Cost Inside

Total Cost with G-Art, Contract

Savings (Higher Cost) Contracting Outside

290,000

severance Overhead: manager’s salary office (internal)

48,000 10,000

office rental equipment depreciation

32,500

other

25,000

Share of general and administrative Total

30,000 $ 475,500

G-Art contract

410,000

Net difference

$ 65,500

Source: Created by case writer.

This document is authorized for use only by Amy Moore in ACCT 6001 - 2020 taught by Mac Gaulin, University of Utah from Dec 2020 to Jun 2021....