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 5.2 percent annually on its investments of those deposits. To compete with larger banks, RSB&T pays depositors 0.5 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	$	1,500,000		2,000,000	uses
Visiting branch	Number of visits		900,000		150,000	visits
Processing transaction	Number of transactions		6,600,000		80,000,000	transactions
Managing functions	Total deposits		6,000,000	$	375,000,000	in deposits
Total overhead		$	15,000,000

 

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 = 0.5 percent of deposits; operating costs are 4 percent (= $15,000,000/$375,000,000) 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

Question 1:

 

Particulars	Amount	Calculation
Sales Revenue	$19,500,000	$ 375m x 5.2%
Less:
Interest Costs	-$1,875,000	$ 375m x 0.5%
Operating Costs	-$15,000,000	given
Operating Profit	$2,625,000

 

Question 2:

Particulars	Profit per customer	Calculation
Customer A	$42	6000 x 0.7%
Customer B	$42	6000 x 0.7%

Profit = Revenue Percentage - Expenses Percentage

= 5.2% - ( 4% + 0.5% )

= 0.7%

 

Question 3:

Activity	Activity Rate	Calculation
Using ATM	0.75	$ 1.5m / 2m
Visiting Branch	6	$ 900k / 150k
Processing Transaction	0.0825	$ 6.6m / 80m
Managing Function	0.016	$ 6m / $ 375m
Activity	Customer A	Customer B
ATM uses	$75	$150
Branch Visits	$30	$120
Number of Transactions	$3.3	$123.75
Average Deposit	$96	$96
	$204.3	$489.75
Particulars	Customer A	Customer B
Sales Revenue	$312	$312
Interest on Deposit	-$30	-$30
Operating Costs	-$204.3	-$489.75
Customer Profit / Loss	$77.7	-$207.75

Q1: $2625000

Q2: $42 per customer

Q3: Customer Profit (A: $77.7) (B: -$207.75)