$ 300,000 Opening and closing accounts Issuing monthly statements Processing transactions Customer inquiries Providing automatic teller machine (ATM) services 450,000 3,075,000 600,000 1,680,000 $6,105,000 Total cost 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
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:
Required:
(Note: Round answers to two decimal places.)
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. What is the average fee
per month that the bank should charge to cover the costs incurred because of checking
accounts?
2. Calculate a cost per account by customer category by using activity rates.
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). Then calculate the profit per account by using the revenue per customer
type and the unit cost per customer type calculated in Requirement 2.
4. CONCEPTUAL CONNECTION 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.
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