In: Accounting
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 6.90 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 |
$ |
4,050,000 |
5,400,000 |
uses |
|
Visiting branch |
Number of visits |
2,430,000 |
405,000 |
visits |
||
Processing transaction |
Number of transactions |
17,820,000 |
216,000,000 |
transactions |
||
Managing functions |
Total deposits |
16,200,000 |
$ |
1,012,500,000 |
in deposits |
|
Total overhead |
$ |
40,500,000 |
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 (= $40,500,000/$1,012,500,000) of deposits.
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.
Solution :
Calculation of operating profit of RSB&T's
Sales Revenue ($1012500000 * 6.9%) |
$69862500 |
|
Costs: |
||
Interest on Deposits ($1012500000 * 0.50%) |
$5062500 |
|
Operating Costs |
$40500000 |
|
Total Costs |
$45562500 |
|
Operating Profit |
$24300000 |
b. Calculation of the profit from Customer A and Customer B, it is assuming that customer costs are based only on deposits. Interest costs = 0.50 percent of deposits; operating costs are 4 percent (= $40,500,000/$1,012,500,000) of deposits.
A |
B |
|
Sales Revenue |
($6000 * 6.9%) =$414 |
($6000 * 6.9%) =$414 |
Costs: |
||
Interest on Deposits |
($6000 * 0.50%) =$30 |
($6000 * 0.50%) =$30 |
Operating Costs |
($6000 * 4%) =$240 |
($6000 * 4%) =$240 |
Total Costs |
$270 |
$270 |
Customer Profit/Loss |
$144 |
$144 |
c. Calculation of the profit from Customer A and Customer B, assuming that customer costs are computed using the information in the activity-based costing analysis.
A |
B |
|
Sales Revenue |
($6000 * 6.9%) =$414 |
($6000 * 6.9%) =$414 |
Interest on Deposits |
($6000 * 0.50%) =$30 |
($6000 * 0.50%) =$30 |
Operating Costs: |
||
Using ATM |
($4050000/5400000)*100 =$75 |
($4050000/5400000)*200 =$150 |
Visiting branch |
($2430000/405000) * 5 =$30 |
($2430000/405000) * 20 =$120 |
Processing transaction |
($17820000/216000000)*40 =$3.30 |
($17820000/216000000)*1500 =$123.75 |
Managing functions |
($16200000/$1012500000)*$6000 =$96 |
($16200000/$1012500000)*$6000 =$96 |
Total operating cost |
$204.30 |
$489.75 |
Customer Profit/Loss |
$179.70 |
($105.75) |