Cushing First National Bank operated for years under the assumption that profitability can be increased by increasing dollar volumes. Historically, First National's efforts were directed towards increasing total dollars of sales and total dollars of account balances. In recent years, however. First National's profits were eroding. Increased competition, particularly from sav¬

ings and loan institutions, was the cause of the difficulties. As key managers discussed the bank's problems, it became apparent to them that they had no idea what their products were costing. Upon reflection, they realized that they often had made decisions to offer a new product which promised to increase dollar balances without any consideration of what it cost to provide the service.

After some discussion, the bank decided to hire a consultant to compute the costs of three products: checking accounts, personal loans, and the gold VISA. The consultant iden¬

tified the following activities, costs, and activity drivers (annual data):

In light of the new cost information, Larry Roberts, the bank president, wanted to know whether a decision made two years ago to modify the bank's checking account product was sound. At that time the service charge was eliminated on accounts with an average annual balance greater than $1,000. Based on increases in the total dollars in checking, Larry was pleased with the new product. The checking account product is described as follows: (1)
Checking account balances greater than $500 earn interest of 2% per year, and (2) A service charge of $5 per month is charged for balances less than $1,000. The bank earns 4% on check¬
ing account deposits. Fifty percent of the accounts are less than $500 and have an average balance of $400 per account. Ten percent of the accounts are between $500 and $1,000 and average $750 per account. Twenty-five percent of the accounts are between $1,000 and $2,767;
the average balance is $2,000. The remaining accounts carry a balance greater than $2,767.
The average balance for these accounts is $5,000. Research indicates that the $2,000 category was by far the greatest contributor to the increase in dollar volume when the checking ac¬
count product was modified two years ago.
Required:
1. Calculate rates for each activity.
2. Using the rates computed in Requirement 1, calculate the cost of each product.
3. Evaluate the checking account product. Are all accounts profitable? Compute the av¬
erage annual profitability per account for the four categories of accounts described in the problem. What recommendations would you make to increase the profitability of the checking account product?

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Activity Activity Cost Activity Driver Providing ATM service $ 100,000 No. of transactions Computer processing 1,000,000 No. of transactions Issuing statements Customer inquiries 800,000 360,000 No. of statements Telephone minutes Activity Capacity 200,000 2,500,000 500,000 600,000 The following annual information on the three products was also made available. Checking Accounts Personal Loans VISA Units of product 30,000 5,000 10,000 ATM transactions 180,000 0 20,000 Computer transactions 2,000,000 200,000 300,000 Number of statements 350,000 50,000 150,000 Telephone minutes 350,000 90,000 160,000