Additional data concerning the usage of the activities by the various customers are also provided — Morrisom National Bank has requested analysis checking account profitability

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:

Additional data concerning the usage of the activities by the various customers are also provided:

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. What is the average fee per month that the bank should charge to cover the costs incurred because of checking accounts?

2. Calculate a cost per account by customer category by using activity rates.

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). Then calculate the profit per account by using the revenue per customer type and the unit cost per customer type calculated in Requirement 2.

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 percent of the customers would switch banks if a checking fee were imposed. Explain how you could verify the president’s argument by using AB

SOLUTION

Cost per account = $6,105,000/75,000 accounts = $81.40 Average fee per month = $81.40/12 fees = $6.78

Activity rates:

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Opening and closing accounts: $300,000/30,000 accounts = $10 per account

Issuing monthly statements: $450,000/900,000 statements = $0.50 per statement

Processing transactions: $3,075,000/30,750,000 transactions = $0.10 per transaction

Customer inquiries: $600,000/3,000,000 minutes = $0.20 per minute

Providing ATM services: $1,680,000/2,400,000 transactions = $0.70 per transaction

Costs assigned:

Opening and closing:	Low		Medium		High
Opening and closing:
$10 × 22,500………………	$ 225,000
$10 × 4,500………………..		$ 45,000	$ 45,000
$10 × 3,000………………..				$30,000	$30,000
Issuing monthly statements:
$0.50 × 675,000………...…	337,500	75,000	75,000
$0.50 × 150,000…………..…		75,000	75,000
$0.50 × 75,000………….…				37,500	37,500
Processing transactions:
$0.10 × 27,000,000……..…	2,700,000
$0.10 × 3,000,000……….…		300,000	300,000
$0.10 × 750,000……………				75,000	75,000

Customer inquiries:	Customer inquiries:	Customer inquiries:
$0.20 × 1,500,000……...…	$0.20 × 1,500,000……...…	$0.20 × 1,500,000……...…	300,000	300,000	300,000	300,000	300,000	300,000	300,000	300,000
$0.20 × 900,000…………..	$0.20 × 900,000…………..	$0.20 × 900,000…………..	180,000	180,000	180,000	180,000	180,000	180,000	180,000	180,000
$0.20	× 600,000……..……	× 600,000……..……	120,000	120,000	120,000	120,000	120,000	120,000	120,000	120,000
Providing ATM services:	Providing ATM services:	Providing ATM services:
$0.70	× 2,025,000……...…	× 2,025,000……...…	1,417,500	1,417,500	1,417,500	1,417,500	1,417,500	1,417,500	1,417,500	1,417,500
$0.70	× 300,000…………..	× 300,000…………..	210,000	210,000	210,000	210,000	210,000	210,000	210,000	210,000
$0.70	× 75,000……………	× 75,000……………	52,500	52,500	52,500	52,500	52,500	52,500	52,500	52,500
Total cost……………………	Total cost……………………	$	$	4,980,000		$	810,000		$	315,000	315,000
÷ Number of accounts………	÷ Number of accounts………			57,000			12,000			6,000	6,000
Cost per account…………	Cost per account…………
Cost per account…………	Cost per account…………	$	$	87.37		$	67.50		$	52.50	52.50

Average profit per account: $90.00 – $81.40 = $8.60 ABC profit measure:

Low-balance customers:	$80.00 – $87.37 =	($7.37)
Medium-balance customers:	$100.00 – $67.50 =	$32.50
High-balance customers:	$165.00 – $52.50 =	$112.50

First, calculate the profits from loans, credit cards, and other products by customer category (using ABC data). Next, compare 50 percent 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 greater than the loss, the president’s argument has merit.