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 7.20 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	$	4,500,000		6,000,000	uses
Visiting branch	Number of visits		2,700,000		450,000	visits
Processing transaction	Number of transactions		19,800,000		240,000,000	transactions
Managing functions	Total deposits		18,000,000	$	1,125,000,000	in deposits
Total overhead		$	45,000,000

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 (= $45,000,000/$1,125,000,000) 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

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

Sales Revenue ($1125000000 * 7.20%)		$81000000
Costs:
Interest on Deposits ($1125000000 * 0.50%)	$5625000
Operating Costs	$45000000
Total Costs		$50625000
Operating Profit		$30375000

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 (= $45,000,000/$1,125,000,000) of deposits.

	A	B
Sales Revenue	($6000 * 7.20%) =$432	($6000 * 7.20%) =$432
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	$162	$162

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 * 7.20%) =$432	($6000 * 7.20%) =$432
Interest on Deposits	($6000 * 0.50%) =$30	($6000 * 0.50%) =$30
Operating Costs:
Using ATM	($4500000/6000000)*100 =$75	($4500000/6000000)*200 =$150
Visiting branch	($2700000/450000) * 5 =$30	($2700000/450000) * 20 =$120
Processing transaction	($19800000/240000000)*40 =$3.30	($19800000/240000000)*1500 =$123.75
Managing functions	($18000000/$1125000000)*$6000 =$96	($18000000/$1125000000)*$6000 =$96
Total operating cost	$204.30	$489.75
Customer Profit/Loss	$197.70	($87.75)