ABC, product costing at banks, cross-subsidization. First International Bank (FIB) is exam¬

ining the profitability of its Premier Account, a combined savings and chequing account.

Depositors receive a 7% annual interest rate on their average deposit. FIB earns an interest rate spread of 3 % (the difference between the rate at which it lends money and the rate it pays depos¬

itors) by lending money for residential home loan purposes at 10%. Thus, FIB would gain $72 on the interest spread if a depositor has an average Premier Account balance of $2,400 in 2007

($2,400 X 3% = $72).

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 $1,200 or more receive unlimited free use of services. Depositors with minimum balances ofless than $1,200 pay a $24 monthly service fee for their Premier Account.

FIB recently conducted an activity-based costing study ofits services. It assessed the fol¬

lowing costs for six individual services. The use of these services in 2007 by three customers is as follows:

ABC-Based Cost Account Usage per Transaction Robinson Skerrett Farrel Deposit/withdrawal with teller $ 3.00 40 50 5 Deposit/withdrawal with automatic teller machine 0.96 10 20 16 Deposit/withdrawal prearranged monthly 0.60 0 12 60 Bank cheques written 9.60 9 3 2 Foreign currency drafts 14.40 4 1 6 Inquiries about account balance 1.80 10 18 9 Average Premier Account balance for 2007 $1,320 $960 $30,000 Assume Robinson and Farrel always maintain a balance above $1,200 while $kerrett always has a balance below $1,200 in 2007.

Required 1. Compute the 2007 profitability of the Robinson, $kerrett, 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?