Oaklawn National Bank has requested an analysis of checking account profitability by customer type

Oaklawn National Bank has requested an analysis of checking account profitability by customer type. Customers are categorized according to the size of their account: low balances, medium balances, and high balances. The activities associated with the three different customer categories and their associated annual costs are given below.

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

                 Account Balance      Low                   Medium                 High

Required

1.    Calculate the cost per account per year by dividing the total cost of processing and maintaining checking accounts by the total number of accounts. What is the average fee per month that the bank should charge to cover the costs incurred because of checking accounts?

2.    Calculate the cost per account by customer category using activity rates.

3.    Currently, the bank offers free checking to all its customers. The interest rev- enues 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 less average cost from Requirement 1). Now calculate the profit per account using the revenue per customer type and the unit cost per customer type calculated in Requirement 2.

4.    After the analysis in Requirement 3, a vice president recommended eliminating the free checking feature for low-balance customers. The bank president expressed reluctance to do so, arguing that the low-balance customers more than made up for the loss through cross sales. He presented a survey that showed that 50 percent of the customers would switch banks if a checking fee were imposed. Explain how you could verify the president’s argument using activity-based costing.