Chapter 8, Problem 67P

Differential Costing

As pointed out earlier in “Here’s the Real Kicker,” Kicker changed banks a couple of years ago because the loan officer at its bank moved out of state. Kicker saw that as an opportunity to take bids for its banking business and to fine-tune the banking services it was using. This problem uses that situation as the underlying scenario but uses three banks: FirstBank, Community Bank, and RegionalOne Bank. A set of representative data was presented to each bank for the purpose of preparing a bid. The data are as follows:

Checking accounts needed: 6

Checks per month:* 2,000

Foreign debits/credits on checking accounts per month: 200

Deposits per month:* 300

Returned checks:* 25 per month

Credit card charges per month: 4,000

Wire transfers per month: 100, of which 60 are to foreign bank accounts

Monthly credit needs (line of credit availability and cost): $100,000 average monthly usage

*These are overall totals for the six accounts during a month.

Internet banking services?

Knowledgeable loan officer?

Responsiveness of bank?

FirstBank Bid:

Checking accounts: $5 monthly maintenance fee per account

$0.10 foreign debit/credit

$0.50 earned for each deposit

$3 per returned check

Credit card fees: $0.50 per item

Wire transfers: $15 to domestic bank accounts, $50 to foreign bank accounts

Line of credit: Yes, this amount is available,

interest charged at prime plus 2%,

subject to a 6% minimum interest rate

Internet banking services? Yes, full online banking available:

$15 one-time setup fee for each account

$20 monthly fee for software module

The loan officer assigned to the potential Kicker account had 10 years of experience with medium to large business banking and showed an understanding of the audio industry.

Community Bank Bid:

Checking accounts: No fees for the accounts, and no credits earned on deposits

$2.00 per returned check

Credit card fees: $0.50 per item,

$7 per batch processed. Only manual processing was available, and

Kicker estimated 20 batches per month

Wire transfers: $30 per wire transfer

Line of credit: Yes, this amount is available:

interest charged at prime plus 2%

subject to a 7% minimum interest rate

Internet banking services? Not currently, but within the next 6 months

The loan officer assigned to the potential Kicker account had 4 years of experience with medium to large business banking, none of which pertained to the audio industry.

RegionalOne Bank Bid:

Checking accounts: $5 monthly maintenance fee per account to be waived for Kicker

$0.20 foreign debit/credit

$0.30 earned for each deposit

$3.80 per returned check

Credit card fees: $0.50 per item

Wire transfers: $10 to domestic bank accounts, $55 to foreign bank accounts

Line of credit: Yes, this amount is available:

interest charged at prime plus 2%

subject to a 6.5% minimum interest rate

Internet banking services? Yes, full online banking available:

one-time setup fee for each account waived for Kicker

$20 monthly fee for software module

The loan officer assigned to the potential Kicker account had 2 years of experience with large business banking. Another branch of the bank had expertise in the audio industry and would be willing to help as needed. This bank was the first one to submit a bid.

Required:

1. 1. Calculate the predicted monthly cost of banking with each bank. Round answers to the nearest dollar.
2. 2. CONCEPTUAL CONNECTION Suppose Kicker felt that full online Internet banking was critical. How would that affect your analysis from Requirement 1? How would you incorporate the subjective factors (e.g., experience, access to expertise)?

To determine

Calculate the predicted monthly cost of banking for each bank.

Explanation of Solution

Cost:

Cost can be defined as the cash and cash equivalent which is incurred against the products or its related services which will benefit the organization in the future.

The following table represents the predicted monthly cost of banking for Bank F:

Cost	Amount ($)	Amount ($)
Checking accounts:
Maintenance fees1	30
Foreign debit/credit2	20
Returned checks3	75
Earnings on deposits4	(150)	(25)
Credit card fees5		2,000
Wire transfers6		3,600
Line of credit charges7		500
Internet banking charges		20
Total monthly charges		6,095

Table (1)

The total amount of monthly charges of Bank F is $6,095.

The following table represents the predicted monthly cost of banking for Bank C:

Cost	Amount ($)	Amount ($)
Checking accounts:
Returned checks8		50
Credit card fees:
Per item9	2,000
Batch processing10	140	2,140
Wire transfers11		3,000
Line of credit charges12		583
Total monthly charges		5,773

Table (2)

The total amount of monthly charges of Bank C is $5,773.

The following table represents the predicted monthly cost of banking for Bank R:

Cost	Amount ($)	Amount ($)
Checking accounts:
Foreign debit/credit13	40
Returned checks14	95
Earnings on deposits15	(90)	45
Credit card fees16		2,000
Wire transfers17		3,700
Line of credit charges18		542
Internet banking charges		20
Total monthly charges		6,307

Table (3)

The total amount of monthly charges of Bank R is $6,307.

Therefore, Bank C has the lowest overall monthly charges that is $5,773.

Working Notes:

1. Calculation of maintenance fees of Bank F:

$\begin{array}{c}\text{Maintenance fees}=\left(\begin{array}{l}\text{Maintenance cost per account}\\ \times \text{Number of checking accounts}\end{array}\right)\\ =\$5\times 6\\ =\$30\end{array}$

Hence, the amount of maintenance fees is $30.

2. Calculation of foreign debit/credit amount for Bank F:

$\begin{array}{c}\text{Foreign debit/credit}=\left(\begin{array}{c}\text{Amount of foreign debit/credit}\\ \times \text{Number of foreign debits/credits}\end{array}\right)\\ =\$0.10\times 200\\ =\$20\end{array}$

Hence, the foreign debit/credit amount is $20.

3. Calculation of returned checks for Bank F:

$\begin{array}{c}\text{Returned checks}=\text{Cost of one returned check}\times \text{Number of returned checks}\\ =\$3\times 25\\ =\$75\end{array}$

Hence, the amount of returned checks is $75.

4. Calculation of earnings on deposits for Bank F:

$\begin{array}{c}\text{Earnings on deposits}=\text{Earnings per deposit}\times \text{Deposits per month}\\ =\$0.50\times 300\\ =\$150\end{array}$

Hence, the amount of earnings on deposits is $150.

5. Calculation of credit card fees Bank F:

$\begin{array}{c}\text{Credit card fees}=\text{Credit card fees per item}\times \text{Credit card charges per month}\\ =\$0.50\times 4,000\\ =\$2,000\end{array}$

Hence, the amount of credit card charges is $2,000.

6. Calculation of wire transfers for Bank F:

$\begin{array}{c}\text{Wire transfers}=\left(\text{Wire transfer of domestic bank}\times \text{Cost of wire transfer}\right)+\\ \left(\text{Wire transfer of foreign bank}\times \text{Cost of wire transfer}\right)\\ =\left(\$15\times 40\right)+\left(\$50\times 60\right)\\ =\$600+\$3,000\\ =\$3,600\end{array}$

Hence, the amount of wire transfers is $3,600.

7. Calculation of line of credit charges Bank F:

$\begin{array}{c}\text{Line of credit charges}=\left(\frac{\text{Minimum interest rate}}{\text{Number of months}}\right)\times \text{Average monthly usage}\\ =\left(\frac{0.06}{12}\right)\times \$100,000\\ =\$500\end{array}$

Hence, the amount of line of credit charges is $500.

8. Calculation of returned checks for Bank C:

$\begin{array}{c}\text{Returned checks}=\text{Cost of one returned check}\times \text{Number of returned checks}\\ =\$2\times 25\\ =\$50\end{array}$

Hence, the amount of returned checks is $50.

9. Calculation of credit card fees per item for Bank C:

$\begin{array}{c}\text{Credit card fees}=\text{Credit card fees per item}\times \text{Credit card charges per month}\\ =\$0.50\times 4,000\\ =\$2,000\end{array}$

Hence, the amount of credit card charges is $2,000.

10. Calculation of credit card fees of batch processing for Bank C:

$\begin{array}{c}\text{Credit card fees}=\text{Batch fees}\times \text{Cost per batch}\\ =\$7\times 20\\ =\$140\end{array}$

Hence, the amount of credit card charges is $140.

11. Calculation of wire transfers for Bank C:

$\begin{array}{c}\text{Wire transfers}=\left(\begin{array}{c}\text{Wire transfer of domestic bank}\\ \times \text{Total cost of wire transfer}\end{array}\right)\\ =\left(\$30\times 100\right)\\ =\$3,000\end{array}$

Hence, the amount of wire transfers is $3,000.

12. Calculation of line of credit charges Bank C:

$\begin{array}{c}\text{Line of credit charges}=\left(\frac{\text{Minimum interest rate}}{\text{Number of months}}\right)\times \text{Average monthly usage}\\ =\left(\frac{0.07}{12}\right)\times \$100,000\\ =\$583\end{array}$

Hence, the amount of line of credit charges is $583.

13. Calculation of foreign debit/credit amount for Bank R:

$\begin{array}{c}\text{Foreign debit/credit}=\left(\begin{array}{c}\text{Amount of foreign debit/credit}\\ \times \text{Number of foreign debits/credits}\end{array}\right)\\ =\$0.20\times 200\\ =\$40\end{array}$

Hence, the foreign debit/credit amount is $40.

14. Calculation of returned checks for Bank R:

$\begin{array}{c}\text{Returned checks}=\text{Cost of one returned check}\times \text{Number of returned checks}\\ =\$3.80\times 25\\ =\$95\end{array}$

Hence, the amount of returned checks is $95.

15. Calculation of earnings on deposits for Bank R:

$\begin{array}{c}\text{Earnings on deposits}=\text{Earnings per deposit}\times \text{Deposits per month}\\ =\$0.30\times 300\\ =\$90\end{array}$

Hence, the amount of earnings on deposits is $90.

16. Calculation of credit card fees Bank R:

$\begin{array}{c}\text{Credit card fees}=\text{Credit card fees per item}\times \text{Credit card charges per month}\\ =\$0.50\times 4,000\\ =\$2,000\end{array}$

Hence, the amount of credit card charges is $2,000.

17. Calculation of wire transfers for Bank R:

$\begin{array}{c}\text{Wire transfers}=\left(\text{Wire transfer of domestic bank}\times \text{Cost of wire transfer}\right)+\\ \left(\text{Wire transfer of foreign bank}\times \text{Cost of wire transfer}\right)\\ =\left(\$10\times 40\right)+\left(\$55\times 60\right)\\ =\$400+\$3,300\\ =\$3,700\end{array}$

Hence, the amount of wire transfers is $3,700.

18. Calculation of line of credit charges Bank R:

$\begin{array}{c}\text{Line of credit charges}=\left(\frac{\text{Minimum interest rate}}{\text{Number of months}}\right)\times \text{Average monthly usage}\\ =\left(\frac{0.065}{12}\right)\times \$100,000\\ =\$542\end{array}$

Hence, the amount of line of credit charges is $542.

To determine

Describe the effect of internet banking on the analysis. Also, describe how to incorporate subjective factors.

Explanation of Solution

If the internet banking is a crucial factor, then Bank C will be eliminated because it does not offer internet banking. Person K will not consider Bank C as an appropriate bank. The monthly cost of Bank F is slightly different from that of Bank R. Therefore, Person K’s deciding factors will be the ability of the bank officers to respond quickly and their expertise in granting loan. If any of the banks satisfy the needs of Person K, then it will be selected.