Question

Solomon Bank’s start-up division establishes new branch banks. Each branch opens with three tellers. Total teller cost per branch is $99,000 per year. The three tellers combined can process up to 85,000 customer transactions per year. If a branch does not attain a volume of at least 55,000 transactions during its first year of operations, it is closed. If the demand for services exceeds 85,000 transactions, an additional teller is hired and the branch is transferred from the start-up division to regular operations.

Required

What is the relevant range of activity for new branch banks?

Determine the amount of teller cost in total and the average teller cost per transaction for a branch that processes 55,000, 65,000, 75,000, or 85,000 transactions. In this case (the activity base is the number of transactions for a specific branch), is the teller cost a fixed or a variable cost?

Determine the amount of teller cost in total and the average teller cost per branch for Solomon Bank, assuming that the start-up division operates 20, 25, 30 or 35 branches. In this case (the activity base is the number of branches), is the teller cost a fixed or a variable cost?

Answer 1

Relevant Range = 55000 to 85000 transactions

Transactions	55000	65000	75000	85000
Total teller cost	$        99,000	$        99,000	$        99,000	$      99,000
Average Cost per transaction	$             1.80	$             1.52	$            1.32	$           1.16

Teller cost is a fixed cost, since it remains for relevant range.

Branches	20	25	30	35
Total teller cost	$   1,980,000	$   2,475,000	$ 2,970,000	$ 3,465,000
Average Cost per Branch	$        99,000	$        99,000	$        99,000	$      99,000

In this case, tell cost is a variable cost, it varies with number of branches.