Question 3 (Total = 14 marks) GFN bank operated for years under the assumption that profitability can be increased by increasing account balances from bank clients. However, they have not paid attention to the costs of operating the various bank products. The bank accountant is now using the activity based costing to find out the costs of operating the three types of products: checking accounts, personal loans and the gold VISA. The accountant has identified the following cost pools and related costs, as well as the cost drivers in operating these products: Cost Pool Activity Cost Activity Driver Providing ATM service Computer processing Issuing statements Customer inquiries Total 100,000 1,000,000 800,000 360.000 $2,260,000 ATM transactions Computer transactions No. of statements Telephone minutes Activity Capacity Number 200,000 2,500,000 500,000 600,000 The following annual information on the three products was also made available: Checking a/cs Personal Loans Gold VISA Units of product 30,000 5,000 10,000 qty gty qty ATM transactions 180,000 20,000 Computer transactions 2,000,000 200,000 300,000 No. of statements 300,000 50,000 150,000 Telephone minutes 350,000 90,000 160,000 Based on the information, the accountant has computed the cost of each product using activity- based costing. After working out the costs of each type of product, the general manager of the bank would like to focus on the product, 'checking account. The checking account product is described as follows: 1. Depositors with average balances greater than $500 earn interest of 2 percent per year from the bank. 2. A service charge of $5 per month is charged on depositors for average balances less than $1,000. 3. The bank earns 4 percent per year on all deposit balances. The checking accounts have been analyzed as follows: Checking a/c balances % of units of Average deposit balance (S) product 1 =$500; $1,000; $2,767 15% 5,000 100% The general manager has now decided to compute the annual profitability of each of the four categories (1. to 4.) of checking account product described above. Required: (a) Compute the cost of each product (checking alcs, P loans, Gold VISA) using activity- based costing. (4 marks) (b) Compute the annual profitability of each of the four categories (1. to 4.) of checking account product described above. (6 marks) (c) Two years ago, the service charge ($5 per month) on depositors was eliminated on checking account balances greater than $1,000 and as a result there was a great increase in the checking account category with average balance of $2,000. In not more than 100 words, comment on the decision to modify the service charge in light of the annual profitability calculated (b/above) for this category? (4 marks)