Problem $5\mathrm{.}58--$ Customers as a Cost Object

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 accounts: low balances, medium balances, and high balances. The activities associated with the three different customer categories and their associated annual costs are as follows:

Description Amount

Opening and closing accounts $$420,000$

Issuing monthly statements $630,000$

Processing transactions $4,305,000$

Customer inquiries $840,000$

Providing automatic teller machine $($ATM$)$ services $2,352,000$

Total cost $$8,547,000$

Additional data concerning the usage of the activities by the various customers are also provided:

Description Account Balance Account Balance Account Balance

Low Medium High

Number of accounts opened$/$closed $31,5006,3004,200$

Number of statements issued $945,000210,000105,000$

Processing transactions $37,800,0004,200,0001,050,000$

Number of telephone minutes $2,100,0001,260,000840,000$

Number of ATM transactions $2,835,000420,000105,000$

Number of checking accounts $79,80016,8008,400$

$80100165$

Required:

$1.$ Calculate a cost per account per year by dividing the total cost of processing and maintaining

checking accounts by the total number of accounts. Round your answer to the nearest cent.

# of checking accounts $/$ total cost

What is the average fee per month that the bank should charge to cover the costs incurred

because of checking accounts? Round your answer to the nearest cent.

$2$ Calculate a cost per account by customer category by using activity rates. Round your answers to the nearest cent.

Description Cost Per Account

Low

Medium

High

$3$ 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 $1).$ Round your answer

to the nearest cent.

Also calculate the profit per account by using the revenue per customer type and the unit cost per customer type calculated in Requirement $2.$ Round to the nearest cent.

Use the minus sign to indicate a loss.

Description Amount

Low$-$balance customers

Medium$-$balance customers

High$-$balance customers