1. Award: 11 out of 11.00 points  

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 5.2 percent annually on its investments of those deposits. To
compete with larger banks, RSB&T pays depositors 0.5 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 $ 1,500,000 2,000,000 uses
Visiting branch Number of visits 900,000 150,000 visits
Processing transaction Number of transactions 6,600,000 80,000,000 transactions
Managing functions Total deposits 6,000,000 $375,000,000 in deposits
Total overhead $ 15,000,000

Data on two representative customers follow.

Customer A Customer B
ATM uses 100 200
Branch visits 5 20
Number of transactions 40 1,500
Average deposit $6,000 $6,000

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 = 0.5 percent of
deposits; operating costs are 4 percent (= $15,000,000/$375,000,000) of deposits.
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.

Complete this question by entering your answers in the tabs below.

Required A Required B Required C

Compute RSB&T's operating profits.

Operating profit $ 2,625,000 

 Required A Required B 

References

Worksheet Learning Objective: 10-03

Describe how the actions of
customers and suppliers affect
a firm’s costs.

Difficulty: 2 Medium Learning Objective: 10-04 Use

activity-based costing methods
to assess customer and
supplier costs.

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 5.2 percent annually on its investments of those deposits. To
compete with larger banks, RSB&T pays depositors 0.5 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 $ 1,500,000 2,000,000 uses
Visiting branch Number of visits 900,000 150,000 visits
Processing transaction Number of transactions 6,600,000 80,000,000 transactions
Managing functions Total deposits 6,000,000 $375,000,000 in deposits
Total overhead $ 15,000,000

Data on two representative customers follow.

Customer A Customer B
ATM uses 100 200
Branch visits 5 20
Number of transactions 40 1,500
Average deposit $6,000 $6,000

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 = 0.5 percent of
deposits; operating costs are 4 percent (= $15,000,000/$375,000,000) of deposits.
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.

Complete this question by entering your answers in the tabs below.

Required A Required B Required C

Compute RSB&T's operating profits.

Operating profit $ 2,625,000

 Required A Required B 

 
Explanation:

a.

Sales revenue $375,000,000 × 5.2% $19,500,000

Costs:
Interest on deposits $375,000,000 × 0.5% 1,875,000
Operating costs (Given) 15,000,000
Total costs 16,875,000
Operating profit $ 2,625,000

b.
Customer A Customer B
Deposit $6,000 $6,000
Sales revenue $ 312a $ 312
Interest on deposits 30b 30
Operating costs 240c 240
Customer profit $ 42 $ 42

a$312 = $6,000 deposit × 5.2%.

b$30= $6,000 deposit × 0.5%.
c$240 = $6,000 deposit × 4% operating cost to deposit ratio (= $15,000,000 ÷ $375,000,000).

c.
Activity Cost Driver Cost Driver Volume Rate
Use ATM Number of uses $1,500,000 ÷ 2,000,000 = $ 0.75 per use
Visit branch Number of visits 900,000 ÷ 150,000 = $ 6 per visit
Process transaction Number of transactions 6,600,000 ÷ 80,000,000 = $ 0.0825 per transaction
General bank overhead Total deposits 6,000,000 ÷ $375,000,000 = 1.6 % of deposits

Customer A Customer B
Units of Cost Units of Cost
Activity Driver Driver
Sales revenue $312.00 $ 312.00
Interest on deposit 30.00 30.00
Account margin $282.00 $ 282.00
 Operating costs:
Use ATM 100 $ 75.00a 200 $ 150.00
Visit branch 5 30.00b 20 120.00
Process transaction 40 3.30c 1,500 123.75
General bank overhead $6,000 96.00d $ 6,000 96.00
Total operating cost $204.30 $ 489.75
Customer profit/loss $ 77.70 $(207.75)

a$75 = 100 uses × $0.75 per use.

b$30 = 5 visits × $6 per visit.
c$3.30 = 40 transactions × $0.0825 per transaction.
d$96.00 = $6,000 deposit × 1.6%.