ABC, product costing at banks, cross-subsidization. First International Bank (FIB) is examining the profitability of its Premier Account, a combined savings and chequing account. Depositors receive a 6% annual interest rate on their average deposit. FIB earns an interest rate spread of 2.5% (the difference between the rate at which it lends money and the rate it pays depositors) by lending money for residential home loan purposes at 8.5%. Thus, FIB would gain $250 on the interest spread if a depositor has an average Premier Account balance of $10,000 in 2009 ($10,000 x 2.5% = $250). The Premier Account allows depositors unlimited use of services such as deposits, withdrawals, chequing account, and foreign currency drafts. Depositors with Premier Account balances of $2,500 or more receive unlimited free use of services. Depositors with minimum balances of less than $2,500 pay a $35 monthly service fee for their Premier Account.

FIB recently conducted an activity-based costing study of its services. It assessed the following costs for six individual services. The use of these services in 2009 by three Premier Account customers is as follows:

REQUIRED 1. Compute the 2009 profitability of the Robinson, Skerrett, and Farrell Premier Accounts at FIB.
2. What evidence is there of cross-subsidization across Premier Accounts? Why might FIB worry about this cross-subsidization if the Premier Account product offering is profitable as a whole?
3. What changes at FIB would you recommend for its Premier Account?LO1

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Deposits/withdrawals with teller Deposits/withdrawals at ATM Prearranged monthly deposit/withdrawal ABC Cost per Transaction Cheques written Foreign currency drafts Account balance inquiries Average cash balance Account Usage Skerrett Farrel Robinson $ 4.00 45 1.20 12 425 55 10 24 18 0.80 0 15 11.25 10 5 60 4 12.50 4 1 7 2.50 12 20 11 $2,600 $1,200 $40,000 Assume Robinson and Farrel always maintain a balance above $2,500 while Skerrett always has a balance below $2,500 in 2009.