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 greater than the loss, the president’s argument has merit.
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 greater than the loss, the president’s argument has merit.
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