RRB is a bank located in Melbourne specialized in loans and savings for retail customers and corporate customers. The manager responsible for retail customers is Katie White and the manager responsible for corporate customers is Jules De Martino. You are an intern working for RRB.

For the sake of simplicity, this assignment does not consider taxes and other fees. You might have to use information from previous questions for answering information for following questions and whenever possible support your arguments with your calculations.

Question 1

RRB has ‘Know Your Customer’ (KYC) procedures for their retail customers and corporate customers; the procedures are (i) Customer Identification Program (CIP), (ii) Customer Due Diligence (CDD), and (iii) Ongoing Monitoring. RRB currently uses the following cost-allocation rate per procedure, based on the following cost drivers used as the allocation base for the previous year:

Table 1 – Cost-allocation rate

KYC procedures	Cost driver used as allocation base	Quantity	Cost-allocation rate
CIP	Applications (potential customers)	1,200	$54
CDD	Applications (potential customers)	1,200	$125
Ongoing Monitoring	Ongoing customers	35,000	$57

Currently, there has been much discussion regarding how much each procedure costs for each activity for retail customers and corporate customers. The accounting department has provided a breakdown for costs for each type of customer and procedure from the previous year.

Table 2 – Costs of procedures per type of customer

KYC procedures	Retail customers	Corporate customers	Total
CIP	$50,000	$15,000	$65,000
CDD	$50,000	$100,000	$150,000
Ongoing Monitoring	$750,000	$1,250,000	$2,000,000
Total costs	$850,000	$1,365,000	$2,215,000

The manager responsible for corporate customers, Jules De Martino, is concerned there is a product-cost cross-subsidisation. As an example, he argues the cost-allocation rate of $54 regarding CIP used for his corporate customers is artificially high because of the costs of CIP for retail customers. The manager responsible for retail customers, Katie White, argues exactly the opposite, that the corporate customers are the one pushing the cost-allocation rate higher, because, when compared to the retail customers, they are few applications in numbers. The commercial department has the breakdown of applications (potential customers) and ongoing customers from the previous year.

Table 3 – Customers

KYC procedures	Retail customers	Corporate customers	Total customers
CIP	1,000	200	1,200
CDD	1,000	200	1,200
Ongoing Monitoring	30,000	5,000	35,000

Required

a) Calculate the cost rate per unit of the cost driver for each KYC procedure for retail customers and corporate customers. 

b) Explain whether there is evidence of product-cost cross-subsidization between retail customers and corporate customers.