Royal Financial Services (RFS) provides front end loan origination services for a number of banks who process and maintain loan portfolios. RFS accepts applications from customers and processes them through closing of the loan agreement before turning the loan over to customer banks. RFS is paid regardless of whether the loan closes or not. RFS currently services three types of loans - residential mortgages, auto loans, and personal unsecured loans. RFS has no cost accounting system so total operating expenses are simply allocated to each product line based on revenue.

For the year just ended, RFS reported financial results as follows:

Income Statement Mortgage Auto Personal Total Annual Volume of Loans 1500 6000 4000 1 1500 Origination Fee/Unit $350 $200 $115 Total Revenues $525,000 $1,200,000 $460,000 $ 2,185,000 Operating Expense $504,673 $1, 153,538 $442, 189 $ 2, 100,400 Profit $ 20,327 $ 46,462 $ 17,811 $ 84,600 Profit % Revenue 3.9% 3.9% 3.9% 3.9%Activities Activity Driver Mortgage Auto Personal Total Cost Accept applications # pages per application 4 3 1 616,000 Obtain credit referrals credit sources/applica 2 2 332,500 Do loan analysis # hours analysis/applica 3 2 656,000 Close loan # hours to close loan 4 2 495,900Mortgage Auto Personal Default rate experienced by loan processor 2% 1% 6% Industry average 2% 3% 4%Royal Financial Services Base Income Statement Income Statement Mortgage Auto Personal Total Annual Volume of Loans 1500 6000 4000 11500 Origination Fee/Unit 350 S 200 S 115 Total Revenues 525,000 1,200,000 460,000 $ 2,185,000 Operating Expense 504,673 1,153,538 442,189 $ 2,100,400 Profit 20,327 $ 46,462 17,811 84,600 Profit % Revenue 3.9% 3.9% 3.9% 3.9% Activities Activity Driver Mortgage Auto Personal Total Cost Cost Driver Rate Accept applications # pages per application INN 616000 77000.00 Obtain credit referrals # credit sources/appl. 332500 66500.00 Do loan analysis # hours analysis/appl. 656000 109333.33 Close loan # hours to close loan A 495900 70842.86 2100400 % of loan applications that get closed Revised ABC Income Statement Mortgage Auto Personal Total Revenues S 525,000 S 1,200,000 S 460,000 Operating Expense Accept applications 308000 231000 77000 Obtain credit referrals 133000 133000 66500 Do loan analysis 328000 218667 109333 Close loan 283371 141686 70843 Total Oper Exp 1052371 724352 323676 Profit -527371 475648 136324 Profit % Revenue -100.5% 39.6% 29.6% Mortgage Auto Personal Default rate experienced by loan processor 2% 1% 6% Industry average 2% 3% 4% Per Unit Mortgage Auto Personal Total Revenues 175,000 1,200,000 460,000 Operating Expense Accept applications 102,667 77,000 25,667 Obtain credit referrals 44,333 44,333 22,167 Do loan analysis 109,333 72,889 36,444 Close loan 94,457 47,229 23,614 Total Oper Exp 431,333 241,451 5 107,892 Profit (256,333) S 958,549 352,108