Depositors receive a 6% annual interest rate on their average deposit. NS 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, NS would gain $250 on the interest spread if a depositor had an average Premier Account balance of $10,000 in 2018 ($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 $22 monthly service fee for their Premier Account Jackson Farrel ABC Cost per Transaction $ 2.70 0.90 Account Usage Whitner 53 21 42 4 7 15 0 12 59 Deposit/withdrawal with teller Deposit/withdrawal at ATM Prearranged monthly deposit/withdrawal Cheques written Foreign currency drafts Account balance inquiries Average cash balance 0.50 7.90 6 3 N 12.00 5 1 8 1.30 8 20 7 $ 1,175 $ 700 $ 24,900 1. Compute the 2018 profitability of the Jackson, Whitner, and Farrel Premier Accounts at NS. 2. What evidence is there of cross-subsidization across Premier Accounts? Why might NS worry about this cross-subsidization if the Premier Account product offering is profitable as a whole? 3. What changes at NS would you recommend for its Premier Account? National Savings (NS) is examining the profitability of its Premier Account, a combined savings and chequing account. (Click the icon to view account information.) NS 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 2018 by three Premier customers as follows. (Click the icon to view the costs for the services and customer information.) Assume Jackson and Farrel always maintain a balance above $2,500, while Whitner always has a balance below $2,500 in 2018. Required enter "0" in the appropriate cell. Round your answers to the nearest cent. Use Requirement 1. Compute the 2018 profitability of the Jackson, Whitner, and Farrel Premier Accounts at NS. (For amounts with a $0 balance, make sure parentheses or a minus sign for operating losses.) Jackson Whitner Farrel Total Revenues Spread revenues on annual basis Monthly fee charges Total revenues Costs Deposit/withdrawal with teller Deposit/withdrawal with ATM Deposit/withdrawal on prearranged basis Bank cheques written Foreign currency drafts Inquiries Total costs Operating income (loss) Requirement 2. What evidence is there of cross-subsidization among the three Premier Accounts? Why might NS worry about this cross-subsidization if the Premier Account product offering is profitable as a whole? Cross-subsidization across individual Premier Accounts occurs when profits made on some accounts The account shows a small profit but only because of the It is unlikely that standpoint. offset by losses on other accounts. The account is highly profitable, while the account is sizably unprofitable. will keep paying these high fees and that NS would want this customer to pay such high fees from customer relationship The facts also suggest that the customers the bank services uniformly. For example, have a lot of transactions with the teller or ATM and also inquire about their account balances more often than NS concerned about the cross-subsidization. Competition likely would understand that high-balance, low-activity type accounts are highly profitable. Offering free services to these customers retain these accounts if other banks offer higher interest rates. Competition likely will the interest rate spread NS can earn on the high-balance, low-activity accounts it is able to retain. likely to Requirement 3. What changes would you recommend for NS's Premier Account? Possible changes NS could make are as follows. a. Offer interest rates on accounts to increase NS's competitiveness in attracting and retaining these accounts. b. In determining its pricing strategy, NS need to consider how other competing banks are pricing their products and services. C. for unlimited use of services