Applying Target Costing to the Service Sector: Sunline Auto Insurance Case

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Applying target costing to the service sector: Sunline
Auto Insurance case
Dr James Wakefield, UTS Business School and Dr Paul Thambar, Monash Business School wrote this case
solely to provide material for class room discussion. The authors do not intend to illustrate either an effective or
ineffective handling of a managerial situation. The authors have based this case on a real-life firm but may have
disguised certain names and other identifying information to protect confidentiality.https://www.coursehero.com/file/21806254/Sunline-Auto-Insurance/
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TEACHING CASE
Background and strategy
Janet Pretty, Business Manager of Sunline Auto Insurance based in Los Angeles, was
in her office on a bright Monday morning in January 2017 reviewing her monthly
performance report. Janet was worried as she reviewed the performance of Sunline for the
last quarter (October to December 2016). The report showed that while sales were growing,
so were losses (Refer Exhibit 1-Table 1).
Sunline was wholly owned by Palm Investments, headquartered in San Francisco,
which owned eight other companies in the finance and insurance sector. Sunline was
managed on a decentralised management by exception basis. The headquarters provided legal
and compliance advice to the subsidiaries and ultimately closely monitored each subsidiary.
Janet Pretty had significant autonomy to develop, promote, sell and manage the activities of
Sunline. Accordingly, she was very concerned about the current state of performance, as she
was directly accountable for the performance realised, even though she had only been
working at Sunline for six months.
Auto insurance was very popular in the state of California due to the high levels of
motor vehicle ownership. Federal government statistics showed that on average, each family
in California owned four motor vehicles. Injury and property damage insurance were legally
required in California. Sunline was only established five years ago and faced a very
competitive market. Customers were quite demanding in the prices they paid for auto
insurance policies and also very selective in terms of the features of the policies. The unique
positioning of insurance policy products to acquire market share was therefore very
important. Since establishment Sunline had grown its market share and customer base
relatively quickly in Los Angeles.https://www.coursehero.com/file/21806254/Sunline-Auto-Insurance/
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Consistent with the management autonomy extended to each subsidiary, Sunline
management could develop unique product offerings. Sunline had developed and focused
solely on a unique product called Ride Cover, specifically targeted at car enthusiasts with
unique cars. The product packaged the compulsory insurance coverage (based on minimum
legal requirements in California 1 ) with comprehensive and collision insurance. Ride Cover
offered unique benefits including full replacement value, a loan vehicle with no mileage limit
while the owner’s vehicle was off the road being repaired, the owner’s choice of repairer and
unlimited roadside assistance in the event of a breakdown. The product was particularly
appealing to customers with customised cars, who had spent significant money and time
modifying these vehicles. The modified nature of these vehicles also meant that mechanical
problems were more likely. Accordingly customers placed great value on the ability to take
the car to the owner’s repairer of choice and receive unlimited roadside assistance. Customers
could also opt for higher levels of injury and property coverage, beyond that required in
California, and lower deductibles as part of the Ride Cover policy.
Ride Cover could be acquired by customers through Sunline stores (in major shopping
centres such as Glendale Galleria, South Coast Plaza and The Beverley Centre), Sunline’s
webpage, Wells Fargo Banks and supermarkets (such as Ralphs). The company also had pop
up stalls at motoring events (including the annual LA Motor Show and various Cars and
Coffee meets) to specifically target enthusiast car owners. In each of these distribution
channels, dedicated staff and/or representatives from the Sunline were available to provide
customer service including assessing customer needs, answering inquiries, pricing policies
and providing general support to customers. The use of multiple distribution channels
provided customers with easy access to Ride Cover.
1 See http://www.dmv.org/ca-california/car-insurance.phphttps://www.coursehero.com/file/21806254/Sunline-Auto-Insurance/
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