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 0.40 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 $ 1,365,000 2,100,000 uses Visiting branch Number of visits 1,336,000 167,000 visits Processing transaction Number of transactions 6,966,000 81,000,000 transactions Managing functions Total deposits 7,360,000 $ 460,000,000 in deposits Total overhead $ 17,027,000 Data on two representative customers follow: Customer A Customer B ATM uses 250 300 Branch visits 5 25 Number of transactions 50 2,300 Average deposit $ 7,700 $ 7,700 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 = 0.40 percent of deposits; operating costs are 4 percent of deposits. (Do not round intermediate calculations. Round your answers to 2 decimal places.) 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.)

Answer 1

Part a - Calculation of Operating Profits

Particulars	Amount
Revenue ($460000000*5.5%)	$25300000
Less : Interest on Deposits ($460000000*0.4%)	$1840000
Operating costs	$17027000
Operating Profit	$6433000

Part b - Profit from customer A and Customer B

Particulars
Revenue %	5.5%
Less : Cost %
Interest on deposits %	0.4%
Operating costs %	4%
Profit %	1.1%

Profit From Customer A = ($7700*1.1%) = $84.7

Profit from customer B = ($7700*1.1%) = $84.7

Part c - Profit from Customer A and B (using activity based costing)

a) Rate per use of ATM = ($1365000/2100000) = $0.65

b) Rate per Visit = ($1336000/167000) = $8

c) Rate per Processing transaction = ($6966000/81000000) = $0.086

d) Managing Function rate = ($7360000/$460000000)*100 = 1.6%

Profit Calculation

Particulars	Customer A	Customer B
Revenue	$423.5 ($7700*5.5%)	$423.5 ($7700*5.5%)
Less : Costs
Interest on deposits	$30.8 ($7700*0.4%)	$30.8 ($7700*0.4%)
Less : Operating costs
ATM use	$162.5 (250*$0.65)	$195 (300*$0.65)
Visit Branch	$40 (5*$8)	$200 (25*$8)
Processing Transaction	$4.3 (50*$0.086)	$25.8 (300*$0.086)
Managing Function	$123.2 ($7700*1.6%)	$123.2 ($7700*1.6%)
Profit	$62.7	-$151.3