Question

Rock Solid Bank and Trust (RSB&T) offers only checking accounts. Customers can write checks and use a network of automated teller machines. RSB&T earns revenue by investing the money deposited; currently, it averages 5.80 percent annually on its investments of those deposits. To compete with larger banks, RSB&T pays depositors 0.50 percent on all deposits. A recent study classified the bank’s annual operating costs into four activities.

Activity	Cost Driver		Cost	Driver Volume
Using ATM	Number of uses	$	2,400,000		3,200,000	uses
Visiting branch	Number of visits		1,440,000		240,000	visits
Processing transaction	Number of transactions		10,560,000		128,000,000	transactions
Managing functions	Total deposits		9,600,000	$	600,000,000	in deposits
Total overhead		$	24,000,000

Data on two representative customers follow.

	Customer A			Customer B
ATM uses		100			200
Branch visits		5			20
Number of transactions		40			1,500
Average deposit	$	6,000		$	6,000

Required:

a. Compute RSB&T's operating profits.

b. Compute the profit from Customer A and Customer B, assuming that customer costs are based only on deposits. Interest costs = 0.50 percent of deposits; operating costs are 4 percent (= $24,000,000/$600,000,000) of deposits.

	Profit Per Customer Customer A Customer B

c. Compute the profit from Customer A and Customer B, assuming that customer costs are computed using the information in the activity-based costing analysis.

	Customer A	Customer B
Sales revenue
Interest on deposit
Total operating cost
Customer profit/loss

Answer 1

1)

Particular	Amount
Sales Revenue	$ 34,800,000
Less:
Interest Costs	$ 3,000,000
Operating Costs	$ 24,000,000
Operating Profit	$ 7,800,000

2)

Particular	Profit per customer
Customer A	$ 6000 * 1.30% = $ 78
Customer B	$ 6000 * 1.30% = $ 78

Note: Total Expenses = 4% + 0.50% of deposits = 4.50%

Sale Revenue = 5.80% of deposits

   So, Profit = 1.30% of deposits (i.e. 5.8% - 4.5%)

3)

Activity	Activity Rate	Calculation
Using ATM	$ 0.75	$ 2,400,000 / 3,200,000
Visiting Branch	$ 6.00	$ 1,440,000 / 240,000
Processing Transaction	$ 0.0825	$ 10,560,000 / 128,000,000
Managing Function	$ 0.016	$ 9,600,000 / 600,000,000

Activity	Customer A	Customer B
Using ATM	$ 75.00	$ 150.00
Visiting Branch	$ 30.00	$ 120.00
Processing Transaction	$ 3.30	$ 123.75
Managing Function	$ 96.00	$ 96.00
Total Operating Costs	$ 204.30	$ 489.75

Particular	Customer A	Customer B
Sales Revenue	$ 348.00	$ 348.00
Interest on deposit	$ 30.00	$ 30.00
Operating Costs	$ 204.30	$ 489.75
Customer Profit/Loss	$ 113.70	$ (171.75)