Customers as a Cost Object Morrisom National Bank has requested an analysis of c

Question

Customers as a Cost Object

Morrisom National Bank has requested an analysis of checking account profitability by customer type. Customers are categorized according to the size of their account: low balances, medium balances, and high balances. The activities associated with the three different customer categories and their associated annual costs are as follows:

Additional data concerning the usage of the activities by the various customers are also provided:

Required:

1. Calculate a cost per account per year by dividing the total cost of processing and maintaining checking accounts by the total number of accounts. Round your answer to the nearest cent.
? $per account per year

What is the average fee per month that the bank should charge to cover the costs incurred because of checking accounts? Round your answer to the nearest cent.
? $per month

2. Calculate a cost per account by customer category by using activity rates. Round your answers to the nearest cent.

3. Currently, the bank offers free checking to all of its customers. The interest revenues average $90 per account; however, the interest revenues earned per account by category are $80, $100, and $165 for the low-, medium-, and high-balance accounts, respectively. Calculate the average profit per account (average revenue minus average cost from Requirement 1). Round your answer to the nearest cent.
? $per account

Also calculate the profit per account by using the revenue per customer type and the unit cost per customer type calculated in Requirement 2. Round to the nearest cent. Use the minus sign to indicate a loss.

4. After the analysis in Requirement 3, a vice president recommended eliminating the free checking feature for low-balance customers. The bank president expressed reluctance to do so, arguing that the low-balance customers more than made up for the loss through cross-sales. He presented a survey that showed that 50% of the customers would switch banks if a checking fee were imposed. Explain how you could verify the president’s argument by using ABC.

First, calculate the profits from loans, credit cards, and other products by customer category (using ABC data). Next, compare 50% of the cross-sales profits from low-balance customers with the total loss from the low-balance checking accounts. If the cross-sales profits are ? ------------ than the loss, the president’s argument has merit.  

Opening and closing accounts $300,000 Issuing monthly statements 450,000 Processing transactions 3,075,000 Customer inquiries 600,000 Providing automatic teller machine (ATM) services 1,680,000 Total cost $6,105,000

Explanation / Answer

However, if cross sale profits are more than the loss of low balance account of $7.37 then the president's argument has merit

if you need any further guidance in above please ask in the comment to this answer. Thanks

Solution to 1. Calculate a cost per account per year Note: Herein we will calculate the solution by dividing the total cost by total number of accounts = Total cost of processing and maintaining the checking accounts / Number of accounts = 6105000/(57000+12000+6000) = 6105000/75000 = $81.4 / per account per year or monthly cost of $6.78 / per account The average fees bank should charge is $6.78 / per month per account Solution to 2. Calculation of a cost per account by customer category by using activity rates Hint: We have been provided with number of transactions / references in each category of cost received for each category of account (i.e. high / medium / low). We also have category wise cost; each category cost shall be divided by reference by category of account Figures in bold reflected calculated figures Activity Associated number and cost Number Low Balances Medium balances High balances Opening & Closing Account Number           30,000.00           22,500.00           4,500.00       3,000.00 Cost         300,000.00         225,000.00        45,000.00     30,000.00 Issuing Monthly statement Number         900,000.00         675,000.00      150,000.00     75,000.00 Cost         450,000.00         337,500.00        75,000.00     37,500.00 Processing transactions Number 30,750,000.00 27,000,000.00 3,000,000.00 750,000.00 Cost     3,075,000.00     2,700,000.00      300,000.00     75,000.00 Customer Inquiry Number     3,000,000.00     1,500,000.00      900,000.00 600,000.00 Cost         600,000.00         300,000.00      180,000.00 120,000.00 Providing ATM Number     2,400,000.00     2,025,000.00      300,000.00     75,000.00 Cost     1,680,000.00     1,417,500.00      210,000.00     52,500.00 Total cost     6,105,000.00     4,980,000.00      810,000.00 315,000.00 Number of checking accounts           75,000.00           57,000.00        12,000.00       6,000.00 Cost per account by customer category                   87.37                 67.50             52.50 Solution to 3. Calculation of average profit per account Average Interest per account             90.00 Average cost per account             81.40 Profit per account               8.60 Category wise profit calculation Particular Low Bal Medium bal High bal Interest revenue earned per account by category                   80.00              100.00           165.00 Less: unit cost per customer type                   87.37                 67.50             52.50 Profit                   (7.37)                 32.50           112.50 Solution to 4. No data in the question has been provided for calculation of profit from cross selling business; As such solution cannot be provided.

However, if cross sale profits are more than the loss of low balance account of $7.37 then the president's argument has merit

if you need any further guidance in above please ask in the comment to this answer. Thanks

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