Acct306 Homework Ch05

Acct306 Homework Ch05 - CHAPTER 5 ACTIVITY-BASED COSTING...

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CHAPTER 5 ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT 5-28 ABC, product-costing at banks, cross-subsidization. 1. Holt Turner Graham Total Revenues Spread revenue on annual basis (3% × ; $1,100, $700, $24,600) Monthly fee charges ($22 × ; 0, 12, 0) Total revenues $ 33.00 0.00 33.00 $ 21.00 264.00 285.00 $738.00 0.00 738.00 $ 792.00 264.00 1,056.00 Costs Deposit/withdrawal with teller $2.30 × 42; 48; 5 Deposit/withdrawal with ATM $0.70 × 7; 19; 17 Deposit/withdrawal on prearranged basis $0.40 × 0; 13; 62 Bank checks written $8.40 × 11; 1; 3 Foreign currency drafts $12.40 × 4; 2; 6 Inquiries $1.40 × 12; 20; 9 Total costs Operating income (loss) 96.60 4.90 0.00 92.40 49.60 16.80 260.30 $(227.30) 110.40 13.30 5.20 8.40 24.80 28.00 190.10 $ 94.90 11.50 11.90 24.80 25.20 74.40 12.60 160.40 $577.60 218.50 30.10 30.00 126.00 148.80 57.40 610.80 $ 445.20 The assumption that the Holt and Graham accounts exceed $1,000 every month and the Turner account is less than $1,000 each month means the monthly charges apply only to Turner. One student with a banking background noted that in this solution 100% of the spread is attributed to the “depositor side of the bank.” He noted that often the spread is divided between the “depositor side” and the “lending side” of the bank. 2. Cross-subsidization across individual Premier Accounts occurs when profits made on some accounts are offset by losses on other accounts. The aggregate profitability on the three customers is $445.20. The Graham account is highly profitable, $577.60, while the Holt account is sizably unprofitable. The Turner account shows a small profit but only because of the $264 monthly fees. It is unlikely that Turner will keep paying these high fees and that NSB would want Turner to pay such high fees from a customer relationship standpoint. The facts also suggest that the customers do not use the bank services uniformly. For example, Holt and Turner have a lot of transactions with the teller, and also inquire about their account balances more often than Graham. This suggests cross-subsidization. NSB should be very concerned about the cross-subsidization. Competition likely would “understand” that high- balance low-activity type accounts (such as Graham) are highly profitable. Offering free services to these customers is not likely to retain these accounts if other banks offer higher interest rates.
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Acct306 Homework Ch05 - CHAPTER 5 ACTIVITY-BASED COSTING...

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