Concept explainers
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. Compute the 2017 profitability of the Lindell, Welker, and Colston Premier Accounts at USB.
Required
- 2. Why might USB worry about the profitability of Individual customers if the Premier Account product offering is profitable as a whole?
- 3. What changes would you recommend for USB’s Premier Account?
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