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 6.90 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	$	4,050,000		5,400,000	uses
Visiting branch	Number of visits		2,430,000		405,000	visits
Processing transaction	Number of transactions		17,820,000		216,000,000	transactions
Managing functions	Total deposits		16,200,000	$	1,012,500,000	in deposits
Total overhead		$	40,500,000

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. Operating Profit?

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 (= $40,500,000/$1,012,500,000) 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.

Customer A Customer B

Sales Revenue

Interest on Deposit

Total Operating Cost

Customer Profit/Loss

Answer 1

a. Compute RSB&T's operating profits. Operating Profit?

Sales Revenue ($1012500000 * 6.9%)		$69862500
Costs:
Interest on Deposits ($1012500000 * 0.50%)	$5062500
Operating Costs	$40500000
Total Costs		$45562500
Operating Profit		$24300000

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 (= $40,500,000/$1,012,500,000) of deposits.

	A	B
Sales Revenue	($6000 * 6.9%) =$414	($6000 * 6.9%) =$414
Costs:
Interest on Deposits	($6000 * 0.50%) =$30	($6000 * 0.50%) =$30
Operating Costs	($6000 * 4%) =$240	($6000 * 4%) =$240
Total Costs	$270	$270
Customer Profit/Loss	$144	$144

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.

	A	B
Sales Revenue	($6000 * 6.9%) =$414	($6000 * 6.9%) =$414
Interest on Deposits	($6000 * 0.50%) =$30	($6000 * 0.50%) =$30
Operating Costs:
Using ATM	($4050000/5400000)*100 =$75	($4050000/5400000)*200 =$150
Visiting branch	($2430000/405000) * 5 =$30	($2430000/405000) * 20 =$120
Processing transaction	($17820000/216000000)*40 =$3.30	($17820000/216000000)*1500 =$123.75
Managing functions	($16200000/$1012500000)*$6000 =$96	($16200000/$1012500000)*$6000 =$96
Total operating cost	$204.30	$489.75
Customer Profit/Loss	$179.70	($105.75)