Chapter 5, Problem 5.30E

ABC, product costing at banks, cross-subsidization. United Savings Bank (USB) is examining the profitability of its Premier Account, a combined savings and checking account. Depositors receive a 2% annual interest rate on their average deposit. USB earns an interest rate spread of 3% (the difference between the rate at which it lends money and the rate it pays depositors) by lending money for home-loan purposes at 5%. Thus. USB would gain $60 on the interest spread if a depositor had an average Premier Account balance of $2,000 in 2017 ($2, 000 × 3% = $60).

The Premier Account allows depositors unlimited use of services such as deposits, withdrawals, checking accounts, and foreign currency drafts.

Depositors with Premier Account balances of $1,000 or more receive unlimited free use of services. Depositors with minimum balances of less than $1,000 pay a $22-a-month service fee for their Premier Account.

USB recently conducted an activity-based costing study of its services. It assessed the following costs for six individual services. The use of these services in 2017 by three customers is as follows:

Assume Lindell and Colston always maintain a balance above $1,000, whereas Welker always has a balance below $1,000.

1. 1. Compute the 2017 profitability of the Lindell, Welker, and Colston Premier Accounts at USB.

Required

1. 2. Why might USB worry about the profitability of Individual customers if the Premier Account product offering is profitable as a whole?
2. 3. What changes would you recommend for USB’s Premier Account?