Question

In: Accounting

Rock Solid Bank and Trust (RSB&T) offers only checking accounts. Customers can write checks and use...

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.

Solutions

Expert Solution

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)


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