Customers as a Cost Object
Morrisom National Bank has requested an analysis of checkingaccount profitability by customer type. Customers are categorizedaccording to the size of their account: low balances, mediumbalances, and high balances. The activities associated with thethree different customer categories and their associated annualcosts 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 thevarious 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 bydividing the total cost of processing and maintaining checkingaccounts by the total number of accounts. Round your answer to thenearest cent.
? $per account per year
What is the average fee per month that the bank should charge tocover the costs incurred because of checking accounts? Round youranswer to the nearest cent.
? $per month
2. Calculate a cost per account by customercategory by using activity rates. Round your answers to the nearestcent.
Cost Per Account Low $ Medium $ High $
3. Currently, the bank offers free checking toall of its customers. The interest revenues average $90 peraccount; however, the interest revenues earned per account bycategory are $80, $100, and $165 for the low-, medium-, andhigh-balance accounts, respectively. Calculate the average profitper account (average revenue minus average cost from Requirement1). Round your answer to the nearest cent.
? $per account
Also calculate the profit per account by using the revenue percustomer type and the unit cost per customer type calculated inRequirement 2. Round to the nearest cent. Use the minus sign toindicate 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 vicepresident recommended eliminating the free checking feature forlow-balance customers. The bank president expressed reluctance todo so, arguing that the low-balance customers more than made up forthe loss through cross-sales. He presented a survey that showedthat 50% of the customers would switch banks if a checking fee wereimposed. Explain how you could verify the presidentâs argument byusing ABC.
First, calculate the profits from loans, credit cards, and otherproducts by customer category (using ABC data). Next, compare 50%of the cross-sales profits from low-balance customers with thetotal loss from the low-balance checking accounts. If thecross-sales profits are ? ------------ than the loss, thepresidentâs argument has merit.
Customers as a Cost Object
Morrisom National Bank has requested an analysis of checkingaccount profitability by customer type. Customers are categorizedaccording to the size of their account: low balances, mediumbalances, and high balances. The activities associated with thethree different customer categories and their associated annualcosts 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 thevarious 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 bydividing the total cost of processing and maintaining checkingaccounts by the total number of accounts. Round your answer to thenearest cent.
? $per account per year
What is the average fee per month that the bank should charge tocover the costs incurred because of checking accounts? Round youranswer to the nearest cent.
? $per month
2. Calculate a cost per account by customercategory by using activity rates. Round your answers to the nearestcent.
| Cost Per Account | |
| Low | $ |
| Medium | $ |
| High | $ |
3. Currently, the bank offers free checking toall of its customers. The interest revenues average $90 peraccount; however, the interest revenues earned per account bycategory are $80, $100, and $165 for the low-, medium-, andhigh-balance accounts, respectively. Calculate the average profitper account (average revenue minus average cost from Requirement1). Round your answer to the nearest cent.
? $per account
Also calculate the profit per account by using the revenue percustomer type and the unit cost per customer type calculated inRequirement 2. Round to the nearest cent. Use the minus sign toindicate 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 vicepresident recommended eliminating the free checking feature forlow-balance customers. The bank president expressed reluctance todo so, arguing that the low-balance customers more than made up forthe loss through cross-sales. He presented a survey that showedthat 50% of the customers would switch banks if a checking fee wereimposed. Explain how you could verify the presidentâs argument byusing ABC.
First, calculate the profits from loans, credit cards, and otherproducts by customer category (using ABC data). Next, compare 50%of the cross-sales profits from low-balance customers with thetotal loss from the low-balance checking accounts. If thecross-sales profits are ? ------------ than the loss, thepresidentâs argument has merit.
