Rock Solid Bank and Trust (RSB&T) offers only checking accounts. Customers can w

Question

Rock Solid Bank and Trust (RSB&T) offers only checking accounts. Customers can write checks and use a network of automated teller machines. RSB&T earns revenue by investing the money deposited; currently, it averages 5.50 percent annually on its investments of those deposits. To compete with larger banks, RSB&T pays depositors 0.40 percent on all deposits. A recent study classified the bank’s annual operating costs into four activities: Activity Cost Driver Cost Driver Volume Using ATM Number of uses $ 1,365,000 2,100,000 uses Visiting branch Number of visits 1,336,000 167,000 visits Processing transaction Number of transactions 6,966,000 81,000,000 transactions Managing functions Total deposits 7,360,000 $ 460,000,000 in deposits Total overhead $ 17,027,000 Data on two representative customers follow: Customer A Customer B ATM uses 250 300 Branch visits 5 25 Number of transactions 50 2,300 Average deposit $ 7,700 $ 7,700 Required: a. Compute RSB&T's operating profits. b.Compute the profit from Customer A and Customer B, assuming that customer costs are based only on deposits. Interest costs = 0.40 percent of deposits; operating costs are 4 percent of deposits. (Do not round intermediate calculations. Round your answers to 2 decimal places.) C. Compute the profit from Customer A and Customer B, assuming that customer costs are computed using the information in the activity-based costing analysis. (Do not round intermediate calculations. Round your answers to 2 decimal places. Loss amounts should be indicated by a minus sign.)

Explanation / Answer

Part a - Calculation of Operating Profits

Part b - Profit from customer A and Customer B

Profit From Customer A = ($7700*1.1%) = $84.7

Profit from customer B = ($7700*1.1%) = $84.7

Part c - Profit from Customer A and B (using activity based costing)

a) Rate per use of ATM = ($1365000/2100000) = $0.65

b) Rate per Visit = ($1336000/167000) = $8

c) Rate per Processing transaction = ($6966000/81000000) = $0.086

d) Managing Function rate = ($7360000/$460000000)*100 = 1.6%

Profit Calculation

$423.5

($7700*5.5%)

$423.5

($7700*5.5%)

$30.8

($7700*0.4%)

$30.8

($7700*0.4%)

$162.5

(250*$0.65)

$195

(300*$0.65)

$40

(5*$8)

$200

(25*$8)

$4.3

(50*$0.086)

$25.8

(300*$0.086)

$123.2

($7700*1.6%)

$123.2

($7700*1.6%)

Particulars Amount Revenue ($460000000*5.5%) $25300000 Less : Interest on Deposits ($460000000*0.4%) $1840000 Operating costs $17027000 Operating Profit $6433000

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