International Trust (IT) is examining the profitability of its Premier Account, a combined savings and chequing account. Depositors receive a 6% annual interest rate on their average deposit. IT earns an interest rate spread of 2.5% (the difference between the rate at which it lends money and the rate it pays depositors) by lending money for residential home loan purposes at 8.5%. Thus, IT would gain $250 on the interest spread if a depositor had an average Premier Account balance of $10,000 in 2015 ($10,000 × 2.5% $ $250).

The Premier Account allows depositors unlimited use of services such as deposits, withdrawals, chequing account, and foreign currency drafts. Depositors with Premier Account balances of $2,500 or more receive unlimited free use of services. Depositors with minimum balances of less than $2,500 pay a $35 monthly service fee for their Premier Account.

IT recently conducted an activity-based costing (ABC) study of its services. It assessed the following costs for six individual services. The use of these services in 2015 by three Premier Account customers is as follows:

Assume Robinson and Farrel always maintain a balance above $2,500 while Skerrett always has a balance below $2,500 in 2015.
Required
1. Compute the 2015 profitability of the Robinson, Skerrett, and Farrell Premier Accounts at IT.
2. What evidence is there of cross-subsidization across Premier Accounts? Why might IT worry about this cross-subsidization if the Premier Account product offering is profitable as a whole?
3. What changes at IT would you recommend for its Premier Account?

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Account Usage ABC Cost per Transaction Robinson Skerrett Farrel 10 18 60 S 4.00 1.20 0.80 11.25 12.50 2.50 45 Deposits/withdrawals with teller Deposits/withdrawals at ATM Prearranged monthly deposit/withdrawal Cheques written Foreign currency drafts Account balance inquiries Average cash balance 12 24 15 10 12 20 $2,600 $1,200 $40,000