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.
In: Accounting
A legal battle for rights owned under OxyCleaners Inc. is likely to be won for $5 million dollars according to a third party legal team. This company is traded on the TSX, and is preparing the financial statements. The legal proceedings are to occur in the next financial period. You, Oxy's new controller, have just received this information. What impact do they have on financials?
In: Accounting
1. Do you think management accountants are involved in tax planning decisions such as those referred to above?
2. Do you think tax avoidance is ever ethical? Is it sustainable?
Across Europe, just how much – or little – US multi-national firms are paying in taxes is coming under intense scrutiny according to an article published in the Washington Post. Most of the investigations revolve around the issue of ‘transfer pricing’, when one part of a large company sells goods or services to another part of the company. While the US companies say they are paying what they owe, European authorities have argued that many firms have developed complex tax strategies to lower their tax bills, sometimes with the help of countries hungry for the jobs they can bring. Many US multinational corporations have established European headquarters in low-tax countries. Apple runs its European operations from Ireland, which has a 12.5 percent corporate tax rate. In 2005, Amazon set up its European operations in Luxembourg, which is known for striking generous tax arrangements. It is argued that the profits have often been routed through low tax European countries, potentially cheating others nations in which the companies operate. The European Parliamentary Research Service estimates that corporate tax avoidance results in a loss of tax revenue to the EU of about €50 billion to €70 billion each year.
In: Accounting
As of December 31, 2019, Blue Spruce Ltd., a public company, has
52,000 common shares outstanding. During 2020, Blue Spruce had the
following transactions.
| 1. | Issued 6,000 common shares at $32 per share, less $5,000 in costs related to the issuance of the shares. | |
| 2. | Issued 4,280 common shares for land appraised at $176,360. The closing price for the shares traded on the TSX was $37 per share on the date of issuance. | |
| 3. | Purchased and retired 500 of the company’s shares at $31 per share. The repurchased shares have an average issue price per share of $34. |
(a)
Prepare the journal entries to record the three transactions
listed.
In: Accounting
Maya started her business on July 1, 2020. The following transactions occurred during the month of July.
Identify the effects of the following transactions on the accounting equation:
|
July |
Transactions |
|
1 |
Maya started her agriculture business with RM150,000 cash. |
|
3 |
Paid RM1,000 in the month for rent of office space. |
|
4 |
Purchased RM1,500 chemicals on credit terms from BioLogic Company. |
|
5 |
Paid RM700 for publicity in the Malaysia Business newspaper. |
|
8 |
Interviewed candidates who applied for a marketing executive position with a monthly salary of RM1,800. |
|
10 |
Customers paid RM3,500 cash for goods purchased. |
|
11 |
The office space was redecorated with the payment of RM4,000 cash. |
|
14 |
Chemicals worth RM25,000 were sold on account. |
|
16 |
Paid RM1,800 in cash for insurance services. |
|
18 |
Employees’ salaries of RM8,000 was paid for by cash. |
|
21 |
Paid the supplies purchased on account on 4th July. |
|
24 |
Received a cash payment of RM20,000 for chemicals sold on account on 14th July. |
|
27 |
The sum of RM600,000 was borrowed from a local bank on a long-term basis. |
|
28 |
Purchased office equipment for RM30,000 on the account. |
|
30 |
Utilities of RM1,500 were settled. |
In: Accounting
Albert started her business on July 1, 2020. The following transactions occurred during the month of July.
Identify the effects of the following transactions on the accounting equation:
|
July |
Transactions |
|
1 |
Albert started her agriculture business with $150,000 cash. |
|
3 |
Paid $1,000 in the month for rent of office space. |
|
4 |
Purchased $1,500 chemicals on credit terms from BioKaput Company. |
|
5 |
Paid $700 for publicity in the Wakanda Business newspaper. |
|
8 |
Interviewed candidates who applied for a marketing executive position with a monthly salary of $1,800. |
|
10 |
Customers paid $3,500 cash for goods purchased. |
|
11 |
The office space was redecorated with the payment of $4,000 cash. |
|
14 |
Chemicals worth $25,000 were sold on account. |
|
16 |
Paid $1,800 in cash for insurance services. |
|
18 |
Employees’ salaries of $8,000 were paid for by cash. |
|
21 |
Paid the supplies purchased on account on 4th July. |
|
24 |
Received a cash payment of $20,000 for chemicals sold on account on 14th July. |
|
27 |
The sum of $600,000 was borrowed from a local bank on a long-term basis. |
|
28 |
Purchased office equipment for $30,000 on the account. |
|
30 |
Utilities of $1,500 were settled. |
In: Accounting
In: Accounting
Case Study 1
The management in Unilever plant in Ontario is preparing for a change. The company plans to improve energy efficiency to help manage the rising and unpredictable energy prices. The plant produces margarine and other vegetable oil products. The cost of energy represents 15% of all production costs. The company expects that the cost will increase further in the coming years, as the energy price are expected to increase further. To meet an aggressive goal of reducing energy consumption by at least 6% per year, the plant’s energy team has implemented, and carefully documented, 120 projects since 1999, saving more than $4.2m in costs (based on 2006 prices), and avoiding about 23,000 tons of greenhouse gases.
One of the solutions was to invest in new technology – a reverse osmosis (RO) system that would enable significant, measurable improvements in the efficiency of the steam plant operations. In the first year of operation, Unilever calculated that the project would lead to net savings of $378,166 (based on 2006 prices), even after accounting for the full cost of operating and maintaining the RO system. It is expected that the technology will pay for itself in less than 16 months.
In order to verify whether the savings by implementing a new technology is significant, the company decided to conduct a research. The objectives of the research were to examine whether reverse osmosis (RO) system is beneficial for companies in the region. It is decided to select a few companies. The list of all companies was available. The management accountant has classified the list into; a) manufacturing, b) extraction and c) other companies. Samples are selected randomly from of these groups.
Based on the above case, answer the following questions.
Question No. 2
In: Accounting
ichole Mustard and Credit Karma are introduced in the chapter's opening feature. Assume that they are considering two options.
Plan A.
The company would begin selling access to a premium version of its website. The new online customers would use their credit cards. The company has the capability of selling the premium service with no additional investment in hardware or software. Annual credit sales are expected to increase by $250,000.
Costs associated with Plan A: Additional wages related to these new sales are $135,500; credit card fees will be 4.75% of sales; and additional record keeping costs will be 6% of sales. Premium service sales will reduce advertising revenue by $8,750 annually because some customers will now only use the premium service.
Plan B.
The company would begin selling merchandise. It would make additional annual credit sales of $500,000.
Costs associated with Plan B: Cost of these new sales
is $375,000. Record keeping and shipping costs will be 4.0% of
sales; and uncollectible accounts will be 6.2% of sales.
Required:
Compute the additional annual net income or loss expected under (a)
Plan A and (b) Plan B. In your first post show your computations
and the expected net income or loss amount. Include your work and
your solution to both plans.
In: Accounting
As of 12/31/03, an insurance company has a known obligation to pay $1,000,000 on
12/31/2007. To fund this liability, the company immediately purchases 4-year 5% annual
coupon bonds totaling $822,703 of par value. The company anticipates reinvestment interest
rates to remain constant at 5% through 12/31/07. The maturity value of the bond equals
the par value. Under the following reinvestment interest rate movement scenarios effective
1/1/2004, what best describes the insurance companys profit or (loss) as of 12/31/2007 after
the liability is paid?
(a) Interest rates drop by 1/2%
(b) Interest rates increase by 1/2%
In: Finance