Activity based costing of customers for Sandy Sun Bank

Sandy Sun Bank and Trust (SSB&T) offers only checking accounts. Customers can write checks and use a network of ATM’s. SSB&T earns revenue by investing the money deposited; currently it averages 5.2 percent annually on it’s investments of those deposits. To compete with larger banks, the bank pays depositors .05% on all deposits. A recent study classified the banks annual operating costs into four activities.

Activity Cost Driver Cost Driver Volume

Using ATM————–number of uses $750,000 10,000,000 uses
Visiting branch……….number of visits 2,250,000 750,000 visits
Processing transaction…number of transactions. 1,500,000 40,000,000 transactions
Managing functions……..total deposits 3,000,000 $187,500,000 in deposits

TOTAL OVERHEAD $7,500,000

DATA ON TWO REPRESENTATIVE CUSTOMERS FOLLOWS:

Customer A Customer B
ATM uses………………………………..200 250
branch visits…………………………….5 20
Number of transactions…………….40 1,500
Average deposit……………………..$200 $6,000

REQUIRED:

a. Compose SSB&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=.05% of deposits; operating costs are 4% (=7,500,000/187,500,000) of deposits

c. Compute the profit from customer A and customer B assuming that customer costs are computed using the information in an activity based costing analysis.

d. How can SSB&T use the information from activity based costing analysis to manage it’s costs?

e. What does SSB&T need to consider before implementing your suggestions from requirement d?