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 5.50 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	$	1,950,000		2,600,000	uses
Visiting branch	Number of visits		1,170,000		195,000	visits
Processing transaction	Number of transactions		8,580,000		104,000,000	transactions
Managing functions	Total deposits		7,800,000	$	487,500,000	in deposits
Total overhead		$	19,500,000

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 (= $19,500,000/$487,500,000) 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

Part A

Net interest earned (487500000*(5.50%-0.50%))	24,375,000
Less: Operating costs	19,500,000
RSB&T's operating profits	4,875,000

Part B

	Customer A	Customer B
Average deposit	6,000	6,000
Multiply: net interest rate (5.50%-0.50%)	5%	5%
Net interest earned	300	300
Less: Operating costs (6000*4%)	240	240
Profit from Customer	60	60

Part C

	Customer A	Customer B
Average deposit	6,000	6,000
Multiply: net interest rate (5.50%-0.50%)	5%	5%
Net interest earned	300.00	300.00
Less: Allocated operating cost	204.30	489.75
Profit (loss) from Customer	95.70	(189.75)

Calculation

Activity Centers	Activity Costs	Divided by : Activity Level	Cost driver rate
ATM uses	1,950,000	2,600,000	0.7500
Branch visits	1,170,000	195,000	6.0000
Processing transaction	8,580,000	104,000,000	0.0825
Managing functions	7,800,000	487,500,000	0.0160

Customer	A
Activity Centers	Cost driver rate	Multiply: Activity	Allocated cost
ATM uses	0.7500	100	75.00
Branch visits	6.0000	5	30.00
Processing transaction	0.0825	40	3.30
Managing functions	0.0160	6,000	96.00
Allocated operating cost			204.30

Customer	B
Activity Centers	Cost driver rate	Multiply: Activity	Allocated cost
ATM uses	0.7500	200	150.00
Branch visits	6.0000	20	120.00
Processing transaction	0.0825	1,500	123.75
Managing functions	0.0160	6,000	96.00
Allocated operating cost			489.75