Question

Rock Solid Bank and Trust (RSB&T) offers only checking accounts. Customers can write checks and use a network of automated teller machines. RSB&T earns revenue by investing the money deposited; currently, it averages 7.00 percent annually on its investments of those deposits. To compete with larger banks, RSB&T pays depositors 0.50 percent on all deposits. A recent study classified the bank’s annual operating costs into four activities.
Activity Cost Driver Cost Driver Volume
Using ATM Number of uses $ 4,200,000 5,600,000 uses
Visiting branch Number of visits 2,520,000 420,000 visits
Processing transaction Number of transactions 18,480,000 224,000,000 transactions
Managing functions Total deposits 16,800,000 $ 1,050,000,000 in deposits
Total overhead $ 42,000,000

Data on two representative customers follow.

Customer A Customer B
ATM uses 100 200
Branch visits 5 20
Number of transactions 40 1,500
Average deposit $ 6,000 $ 6,000

Required:
a. Compute RSB&T's operating profits.
b. Compute the profit from Customer A and Customer B, assuming that customer costs are based only on deposits. Interest costs = 0.50 percent of deposits; operating costs are 4 percent (= $42,000,000/$1,050,000,000) of deposits.
c. Compute the profit from Customer A and Customer B, assuming that customer costs are computed using the information in the activity-based costing analysis.

Answer 1

A) RSB&T's operating profits are 2,625,000.

B) The profit from Customer A = 42 and Customer B=42.

C) The profit from Customer A=77.7 and Customer B=-207.75(loss)

What does mean by profit?

• Profit is the term used to describe the financial gain experienced when the revenue from a commercial activity outweighs the costs, costs, and taxes incurred to maintain the activity in question.
• A business's financial gain when revenue exceeds costs and expenses is frequently referred to as profit. One cup of lemonade, for instance, costs a child at a lemonade stand one quarter. She then charges $2 for the beverage. She made $1.75 in profit on the cup of lemonade.
• All costs are first deducted from sales, and the result is then divided by sales. This creates the profit formula, which is expressed as a percentage. (Sales - Expenses) Sales = Profit is the formula.

Data on two representative customers follow.

[A] Compute RSB&T's operating profits.

Computation of Operating Profits:-

Revenue                                   19,500,000

Interest to Depositors            (1,875,000)

Overheads                          (15,000,000)

Total operating Profit              2,625,000

[B] Costs are based only on Deposits

Particulars       A          B

Revenue               312           312

Interest Cost        -30         -30

Operating Cost    -240       -240

Profits                42        42

[C] As per Activity based costing

Particulars                       A              B

Revenue                              312      312

Interest Cost                       -30      -30

ATM Uses                       -75     -150

Branch Visit                       -30     -120

Processing Transaction      -3.3   -123.75

Managing Function        -96      -96

Profits/Loss                        77.7     -207.75

Therefore,

A) RSB&T's operating profits are 2,625,000.

B) The profit from Customer A = 42 and Customer B=42.

C) The profit from Customer A=77.7 and Customer B=-207.75(loss)

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