Question

Customers as a Cost Object

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

4. After the analysis in Requirement 3, a vice president recommended eliminating the free checking feature for low-balance customers. The bank president expressed reluctance to do so, arguing that the low-balance customers more than made up for the loss through cross-sales. He presented a survey that showed that 50% of the customers would switch banks if a checking fee were imposed. Explain how you could verify the president’s argument by using ABC.

First, calculate the profits from loans, credit cards, and other products by customer category (using ABC data). Next, compare 50% of the cross-sales profits from low-balance customers with the total loss from the low-balance checking accounts. If the cross-sales profits are ? ------------ than the loss, the president’s argument has merit.  

Answer 1

Solution to 1.
Calculate a cost per account per year
Note: Herein we will calculate the solution by dividing the total cost by total number of accounts
=	Total cost of processing and maintaining the checking accounts / Number of accounts
=	6105000/(57000+12000+6000)
=	6105000/75000
=	$81.4 / per account per year or monthly cost of $6.78 / per account
	The average fees bank should charge is $6.78 / per month per account
Solution to 2.
Calculation of a cost per account by customer category by using activity rates
Hint: We have been provided with number of transactions / references in each category of cost received for each category of account (i.e. high / medium / low). We also have category wise cost; each category cost shall be divided by reference by category of account
Figures in bold reflected calculated figures
Activity		Associated number and cost		Number
				Low Balances	Medium balances	High balances
Opening & Closing Account		Number	30,000.00	22,500.00	4,500.00	3,000.00
		Cost	300,000.00	225,000.00	45,000.00	30,000.00
Issuing Monthly statement		Number	900,000.00	675,000.00	150,000.00	75,000.00
		Cost	450,000.00	337,500.00	75,000.00	37,500.00
Processing transactions		Number	30,750,000.00	27,000,000.00	3,000,000.00	750,000.00
		Cost	3,075,000.00	2,700,000.00	300,000.00	75,000.00
Customer Inquiry		Number	3,000,000.00	1,500,000.00	900,000.00	600,000.00
		Cost	600,000.00	300,000.00	180,000.00	120,000.00
Providing ATM		Number	2,400,000.00	2,025,000.00	300,000.00	75,000.00
		Cost	1,680,000.00	1,417,500.00	210,000.00	52,500.00
Total cost			6,105,000.00	4,980,000.00	810,000.00	315,000.00
Number of checking accounts			75,000.00	57,000.00	12,000.00	6,000.00
Cost per account by customer category				87.37	67.50	52.50
Solution to 3.
Calculation of average profit per account
Average Interest per account						90.00
Average cost per account						81.40
Profit per account						8.60
Category wise profit calculation
Particular				Low Bal	Medium bal	High bal
Interest revenue earned per account by category				80.00	100.00	165.00
Less: unit cost per customer type				87.37	67.50	52.50
Profit				(7.37)	32.50	112.50
Solution to 4.
No data in the question has been provided for calculation of profit from cross selling business; As such solution cannot be provided.
However, if cross sale profits are more than the loss of low balance account of $7.37 then the president's argument has merit if you need any further guidance in above please ask in the comment to this answer. Thanks