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 5.90 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	$	2,550,000		3,400,000	uses
Visiting branch	Number of visits		1,530,000		255,000	visits
Processing transaction	Number of transactions		11,220,000		136,000,000	transactions
Managing functions	Total deposits		10,200,000	$	637,500,000	in deposits
Total overhead		$	25,500,000

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

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 = {{0.5:#,##0.00}} percent of deposits; operating costs are 4 percent (= $25,500,000/$637,500,000) of deposits. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Profit Per Customer Customer A Customer B

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. (Do not round intermediate calculations. Round your answers to 2 decimal places. Loss amounts should be indicated by a minus sign.)

	Customer A Customer B Sales revenue Interest on deposit Total operating cost Customer profit/loss

Answer 1

A.

Interest Revenue	$ 3,76,12,500	=637500000*5.9%
Expenses
Interest Expense	$      31,87,500	=637500000*0.5%
Overhead Expense	$ 2,55,00,000
Operating Profit	$     89,25,000

B.

	Customer A	Customer B
Interest Revenue	$                 354	$                  354
Expenses
Interest Expense	$                   30	$                    30
Overhead Expense	$                 240	$                  240
Operating Profit	$                   84	$                    84

C.

Activity	Cost	Estimated Activity Volume	Cost per cost driver
a	b	c	d	e = b/c
Using ATM	$      25,50,000	3400000	uses	$                0.75
Visiting Branch	$      15,30,000	255000	visits	$                6.00
Processing transactions	$ 1,12,20,000	136000000	transactions	$                0.08
Managing Functions	$ 1,02,00,000	637500000	deposits	1.60%
	$ 2,55,00,000
	Customer A	Customer B
Interest Revenue	$           354.00	$            354.00
Expenses
Interest Expense	$             30.00	$               30.00
Overhead Expense
Using ATM	$             75.00	$            150.00
Visiting Branch	$             30.00	$            120.00
Processing transactions	$               3.30	$            123.75
Managing Functions	$             96.00	$               96.00
Operating Profit	$           119.70	$           -165.75