National SavingsBank (NSB) is examining the profitability of its PremierAccount, a combined savings and checking account.NSB recently conducted an activity-based costing study of its services. It assessed the following costs for six individual services. The use of these services in2017 by three customers is as follows:Assume Lindenand Gonzalez always maintain a balance above $1,000, whereas Whitner always has a balance below $1,000. Depositors receive a 2% annual interest rate on their average deposit. NSB 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, NSB would gain $60 on the interest spread if a depositor had an average Premier Account balance of $2,000 in 2017 ($2,000 x 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. 1. Compute the 2017 profitability of the Linden, Whitner, and Gonzalez Premier Accounts at NSB. 2. Why might NSB 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 NSB's Premier Account?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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National SavingsBank (NSB) is examining the profitability of its PremierAccount, a combined savings and checking account.NSB recently conducted an activity-based costing study of its services. It assessed the following costs for six individual services. The use of these services in2017 by three customers is as follows:Assume Lindenand Gonzalez always maintain a balance above $1,000, whereas Whitner always has a balance below $1,000.

Depositors receive a 2% annual interest rate on their average deposit.

NSB 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, NSB would gain $60 on the interest spread if a depositor had an average Premier Account balance of $2,000 in

2017 ($2,000 x 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.

1.	Compute the 2017 profitability of the Linden, Whitner, and Gonzalez Premier Accounts at NSB.
2.	Why might NSB 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 NSB's Premier Account?