xercise 10-32 (Algo) Activity-Based Costing of Customers (LO 10-3, 4) 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 5.50 percent annually on its investments of those deposits. To compete with larger banks, RSB&T pays depositors 0.50 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 $ 1,950,000 2,600,000 uses Visiting branch Number of visits 1,170,000 195,000 visits Processing transaction Number of transactions 8,580,000 104,000,000 transactions Managing functions Total deposits 7,800,000 $ 487,500,000 in deposits Total overhead $ 19,500,000 Data on two representative customers follow. Customer A Customer B ATM uses 100 200 Branch visits 5 20 Number of transactions 40 1,500 Average deposit $ 6,000 $ 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 = 0.50 percent of deposits; operating costs are 4 percent (= $19,500,000/$487,500,000) 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.

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter15: Managing Short-term Assets

Section: Chapter Questions

Problem 12PROB

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Exercise 10-32 (Algo) Activity-Based Costing of Customers (LO 10-3, 4)

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 5.50 percent annually on its investments of those deposits. To compete with larger banks, RSB&T pays depositors 0.50 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	$	1,950,000		2,600,000	uses
Visiting branch	Number of visits		1,170,000		195,000	visits
Processing transaction	Number of transactions		8,580,000		104,000,000	transactions
Managing functions	Total deposits		7,800,000	$	487,500,000	in deposits
Total overhead		$	19,500,000

Data on two representative customers follow.

	Customer A	Customer B
ATM uses		100		200
Branch visits		5		20
Number of transactions		40		1,500
Average deposit	$	6,000	$	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 = 0.50 percent of deposits; operating costs are 4 percent (= $19,500,000/$487,500,000) 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.

Expert Solution