Question

First International Bank ​(FIB​) is examining the profitability of its Premier​ Account, a combined savings and checking account.

FIB recently conducted an​ activity-based costing study of its services. It assessed the following costs for six individual services. The use of these services in 2017 by three customers is as​ follows:

Assume Robinson and Butler always maintain a balance above​ $1,000, whereas Slaton always has a balance below​ $1,000.

Account Usage Activity-Based Cost per "Transaction"   Robinson   Slaton Butler

Deposit/withdrawal with teller $2.40 42 54 6

Deposit/withdrawal with automatic teller machine (ATM) 0.80 12 24 17

Deposit/withdrawal on prearranged monthly basis 0.40 0 14 58

Bank checks written 8.40 8 4 1

Foreign currency drafts 12.20 3 2 5

Inquiries about account balance 1.20 9 19 8

Average Premier Account balance for 2017 $1,325 $800 $25,500

Depositors receive a​ 2% annual interest rate on their average deposit. FIB earns an interest rate spread of 3​% ​(the difference between the rate at which it lends money and the rate it pays​ depositors) by lending money for​ home-loan purposes at​ 5%. Thus, FIB would gain​ $60 on the interest spread if a depositor had an average Premier Account balance of​ $2,000 in 2017 ​($2,000 x 3​% ​= $60). The Premier Account allows depositors unlimited use of services such as​ deposits, withdrawals, checking​ accounts, and foreign currency drafts. Depositors with Premier Account balances of​ $1,000 or more receive unlimited free use of services. Depositors with minimum balances of less than​ $1,000 pay a $20​-a-month service fee for their Premier Account.

1.	Compute the 2017 profitability of the Robinson​, Slaton​, and Butler Premier Accounts at FIB.
2.	Why might FIB worry about the profitability of individual customers if the Premier Account product offering is profitable as a​ whole?
3.	What changes would you recommend for FIB​'s Premier​ Account?

Answer 1