Prior to 1980, banks did not charge at all for maintaining checking accounts. Banks competed fiercely with each other to attract more depositors, and offered free services to do so. In the 1980s interest rates escalated steeply, and banks profit margins were squeezed because interest rates on long term loans to business firms had been locked in at low rates, while the interest paid to depositors had to adjust to market conditions. Many banks failed. Consequently, banks became much more conscious of the costs they incurred for maintaining checking accounts. It became customary to charge depositors a fee per check written. As their accounting systems became more sophisticated, banks looked for ways to price discriminate between different types of depositors.

Pitt National Bank has requested an analysis of its costs for servicing checking accounts. It has broadly grouped its depositors into three categories, depending on their average daily account balances: low balance, medium balance and high balance. The analysis that was conducted revealed the following activity costs associated with the servicing of checking accounts at Pitt:

Cost of opening and closing accounts $ 200,000

Cost of issuing monthly statements $ 300,000

Cost of processing transactions $2,050,000

Cost of customer inquiries $ 400,000

Cost of ATM services $1,120,000

Total service costs $4,070,000

The following data on driver volumes was also collected:

Type of Depositor_________

Low Medium High

Number of checking accounts 38,000 8,000 4,000

Number of accounts opened/closed 15,000 3,000 2,000

Number of transactions processed 18,000,000 2,000,000 500,000

Number of telephone minutes 1,000,000 600,000 400,000

Number of ATM transactions 1,350,000 200,000 50,000

Required:

1)Determine the overall average cost of servicing a checking account customer at Pitt.

2)Determine the average cost per customer type, using activity based costing techniques.

3)Describe ways in which banks could price discriminate among customer types, without being offensive to customers.