A. RFS is considering adding a new product line, Home Equity Loans, which RFS be
ID: 2377063 • Letter: A
Question
A. RFS is considering adding a new product line, Home Equity Loans, which RFS believes will make the mortgage business more attractive to their customers. RFS research shows they could originate 500 of these loans at $230 each. RFS would have to process a 3 page application, obtain 2 credit referrals from outside credit agencies, do 2.5 hours of loan analysis, and complete a 4 hour closing process, with 85% of applications being closed. RFS believes existing resources in the company can handle the additional application processing and loan analysis work. Using the cost driver rates you developed in part A, compute the estimated incremental and fully loaded profitability of this new line of business for RFS. Note: incremental analysis would only include the incremental costs that result from adding home equity loans.
Explanation / Answer
Resid. Auto Personal
Mortg. Loan Unsecured
Sales Revenue
1500x350 $525,000
6000x200 $1,200,000
4000x115 $460,000
___________________________________
Accept application
$616,000x4/8 $308,000
$616,000x3/8 $231,000
$616,000x1/8 $77,000
Obtain Credit Referrals
$332,500x2/5 $133,000
$332,500x2/5 $133,000
$332,500x1/5 $66,500
Loan analysis
$656,000x3/6 $328,000
$656,000x2/6 $218,667
$656,000x1/6 $109,333
Close loan
$495,900x4/7 $283,371
$495,900x2/7 $141,686
$495,900x1/7 $70,843
____________________________________
Total costs $1,052,371 $724,353 $323,676
Profit -$527,371 $475,647 $136,324
PU profitability
-527371/1500 -$351.58
475647/6000 $79.27
136324/4000 $34.08
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.