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First International Bank (FIB) is examining the profitability of its Premier Account, a combined savings and checking account. FIB recently conducted an activity-based costing study

First International Bank (FIB) is examining the profitability of its Premier Account, a combined savings and checking 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 2017 by three customers is as follows:

Assume Robinson and Butler always maintain a balance above $1,000, whereas Slaton always has a balance below $1,000.

Account Usage Activity-Based Cost per "Transaction" Robinson Slaton Butler

Deposit/withdrawal with teller $2.40 42 54 6

Deposit/withdrawal with automatic teller machine (ATM) 0.80 12 24 17

Deposit/withdrawal on prearranged monthly basis 0.40 0 14 58

Bank checks written 8.40 8 4 1

Foreign currency drafts 12.20 3 2 5

Inquiries about account balance 1.20 9 19 8

Average Premier Account balance for 2017 $1,325 $800 $25,500

Depositors receive a 2% 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 depositors) by lending money for home-loan purposes at 5%. Thus, FIB would gain $60 on the interest spread if a depositor had an average Premier Account balance of $2,000 in 2017 ($2,000 x 3% = $60). The Premier Account allows depositors unlimited use of services such as deposits, withdrawals, checking accounts, and foreign currency drafts. Depositors with Premier Account balances of $1,000 or more receive unlimited free use of services. Depositors with minimum balances of less than $1,000 pay a $20-a-month service fee for their Premier Account.

1.

Compute the 2017 profitability of the Robinson, Slaton, and Butler Premier Accounts at FIB.

2.

Why might FIB worry about the profitability of individual customers if the Premier Account product offering is profitable as a whole?

3.

What changes would you recommend for FIB's Premier Account?

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