See attached File

Topic: Activity Based Costing

Problem 7-37Customers as a Cost Object Security National Bank has requested an analysis of chequing account profitability by customer type. Customers are categorized according to the size of their account: low balances, medium balances, and high balances. The activities associated with the three different customer categories and their associated annual costs are as follows: OBJECTIVE 1 2 3 OBJECTIVE 2 3 (Continued) Opening and closing accounts Issuing monthly statements Processing transactions Customer inquiries Providing automated teller machine (ATM) services Total cost $200,000 300,000 2,050,000 400,000 1,120,000 $4,070,000 Additional data concerning the usage of the activities by the various customers are also provided: Number of accounts opened/closed Number of statements issued Processing transactions Number of telephone minutes Number of ATM transactions Number of chequing accounts Low 15,000 450,000 18,000,000 1,000,000 1,350,000 38,000 Account Balance Medium 3,000 100,000 2,000,000 600,000 200,000 8,000 High 2,000 50,000 500,000 400,000 50,000 4,000 Required: Round answers to two decimal places. 1. Calculate a cost per account per year by dividing the total cost of processing and maintain- ing chequing accounts by the total number of accounts. What is the average fee per month that the bank should charge to cover the costs incurred because of chequing accounts? 2.Calculate a cost per account by customer category by using activity rates. 3.Currently, the bank offers free chequing to all of its customers. The interest revenues aver- age $90 per account; however, the interest revenues earned per account by category are $80, $100, and $165 for the low-, medium-, and high-balance accounts, respectively. Calculate the average profit per account (average revenue less average cost from Requirement 1). Then calculate the profit per account by using the revenue per customer type and the unit cost per customer type calculated in Requirement 2. 4.After the analysis in Requirement 3, a vice-president recommended eliminating the free che- quing feature for low-balance customers. The bank president expressed reluctance to do so, arguing that the low-balance customers more than made up for the loss through cross-sales. He presented a survey that showed that 50 percent of the customers would switch banks if a chequing fee were imposed. Explain how you could verify the president?s argument by using ABC.