Question

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 6.50 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	$	3,450,000		4,600,000	uses
Visiting branch	Number of visits		2,070,000		345,000	visits
Processing transaction	Number of transactions		15,180,000		184,000,000	transactions
Managing functions	Total deposits		13,800,000	$	862,500,000	in deposits
Total overhead		$	34,500,000

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 (= $34,500,000/$862,500,000) 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.

Answer 1

a.

Revenue ($862,500,000 * 6.5%)	$56,062,500
Less: Interest cost ($862,500,000 * 0.5%)	4,312,500
Less: Total overhead	34,500,000
Operating profit	$17,250,000

b.

	Customer A	Customer B
Revenue	$390 (6,000*6.5%)	$390 (6,000*6.5%)
Less: Interest cost	30 (6,000*0.5%)	30 (6,000*0.5%)
Less: Total overhead cost	240 (6,000*4%)	240 (6,000*4%)
Customer profit	$120	$120

c.

Activity	Activity rate		Customer A	Customer B
Using ATM	0.75 (3,450,000/4,600,000)	per uses	$75 (100*$0.75)	$150 (200*$0.75)
Visiting Branch	6 (2,070,000/345,000)	per visits	30 (5*$6)	120 (20*$6)
Processing transaction	0.0825 (15,180,000/184,000,000)	per transactions	3.3 (40*$0.0825)	123.75 (1,500*$0.0825)
Managing functions	0.016 (13,800,000/862,500,000)	per deposits	96 (6,000*$0.016)	96 (6,000*$0.016)
Total overhead cost			$204.3	$489.75

	Customer A	Customer B
Revenue	$390 (6,000*6.5%)	$390 (6,000*6.5%)
Less: Interest cost	30 (6,000*0.5%)	30 (6,000*0.5%)
Less: Total overhead cost	204.3	489.75
Customer profit	$155.7	$(129.75)