Question:
Activity-Based Costing of Customers
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
|
$ 750,000
|
10,000,000 uses
|
|
Visiting branch
|
Number of visits
|
2,250,000
|
750,000 visits
|
|
Processing transaction
|
Number of transactions
|
1,500,000
|
40,000,000 transactions
|
|
Managing functions
|
Total deposits
|
3,000,000
|
$187,500,000 in deposits
|
|
Total overhead
|
$7,500,000
|
|
Data on two representative customers follow:
|
|
Customer A
|
Customer B
|
|
ATM uses
|
200
|
250
|
|
Branch visits
|
5
|
20
|
|
Number of transactions
|
40
|
1,500
|
|
Average deposit
|
$200
|
$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 (= $7,500,000/$187,500,000) 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.