First Asian Bank (FAB) is examining the profitability of its Premier Account, a combined savings and current account. Depositors receive a 6% annual interest rate on their average deposit. FAB earns an interest rate spread of 4% (the difference between the rate at which it lends money and the rate it pays depositors) by lending money for home loan purposes at 10%. Thus, FAB would gain $80 on the interest spread if a depositor had an average Premier Account balance of $2,000 in 20x6 ($2,000 x 4% = $80).

The Premier Account allows depositors unlimited use of services such as deposits, withdrawals, current accounts, and foreign currency drafts. Depositors with Premier Account balances of $2,000 or more receive unlimited free use of services. Depositors with minimum balances of less than $2,000 pay a $45-a-month service fee for their Premier Account.

FAB 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 20x6 by three customers is as follows:

	Activity-Based
	Cost per	Account Usage
	Transaction	Lau	Siu	Wong
Deposit/withdrawal with teller	$7.20	40	25	5
Deposit/withdrawal with automatic teller
machine(ATM)	2.40	36	66	5
Deposit/withdrawal on prearranged
monthly basis	1.50	0	10	5
Bank cheques written	24.00	20	6	4
Foreign currency drafts	4.00	16	4	14
Inquiries about account balance	4.50	10	16	9
Average Premier Account balance for 20x6		$2,600	$1,800	$50,000

Assume Lau and Wong always maintain a balance above $2,000, whereas Siu always has a balance below $2,000.

Required:

(a) Determine the 20x6 profitability of the Lau, Siu, and Wong Premier Accounts at FAB. (18 marks)

(b) What evidence is there of cross-subsidization among the three Premier Accounts? Why might FAB worry about this cross-subsidization if the Premier Account product offering is profitable as a whole? (6 marks)

(c) Recommend two ways to improve FABs Premier Account. (6 marks)