Question

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: 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 Additional data concerning the usage of the activities by the various customers are also provided: Account Balance Low Medium High Number of accounts opened/closed 22,500 4,500 3,000 Number of statements issued 675,000 150,000 75,000 Processing transactions 27,000,000 3,000,000 750,000 Number of telephone minutes 1,500,000 900,000 600,000 Number of ATM transactions 2,025,000 300,000 75,000 Number of checking accounts 57,000 12,000 6,000 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. Cost Per Account Low $ Medium $ High $ 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. Low-balance customers $per account Medium-balance customers $per account High-balance customers $per account

Answer 1

Requirement 1
Calculation of a cost per account per year
	=	Total cost of processing and maintaining the checking accounts / Number of accounts
	=	6105000/(57000+12000+6000)
	=	81.4
Requirement 2
Calculation of a cost per account by customer category by using activity rates
Activity		Associated number and cost		Number
				Low Balances	Medium balances	High balances
Opening & Closing Account		Number	30000	22500	4500	3000
		Cost	300000	225000	45000	30000
Issuing Monthly statement		Number	900000	675000	150000	75000
		Cost	450000	337500	75000	37500
Processing transactions		Number	30750000	27000000	3000000	750000
		Cost	3075000	2700000	300000	75000
Customer Inquiry		Number	3000000	1500000	900000	600000
		Cost	600000	300000	180000	120000
Providing ATM		Number	2400000	2025000	300000	75000
		Cost	1680000	1417500	210000	52500
Total cost			6105000	4980000	810000	315000
Number of checking accounts			75000	57000	12000	6000
Cost per account by customer category				87.37	67.50	52.50
Requirement 3
Calculation of average profit per account
	Average Interest revenue per account			90
	Less : average cost per account from requirement 1			81.4
	Average profit per account			8.6
Calculation of profit by revenue per customer type and unit cost per customer type
				Low Balances	Medium balances	High balances
	Interest revenue earned per account by category			80	100	165
	Less: unit cost per customer type			87.37	67.50	52.50
	Profit eanred			-7.37	32.50	112.50