abc product costing at banks cross subsidization first intern 268560

ABC, product costing at banks, cross subsidization. First International Bank (FIB) is examining the profitability of its Premier Account, a combined savings and checking account. Depositors receive a 7% annual interest rate on their average deposit. FIB earns an interest rate spread of 3% (the difference between the rate at which it lends money and the rate it pays depositors) by lending money for home loan purposes at 10%. Thus, FIB would gain $60 on the interest spread if a depositor had an average Premier Account balance of $2,000 in 2008 ($2,000 X 3% $60).

The Premier Account allows depositors unlimited use of services such as deposits, withdrawals, checking accounts, and foreign currency drafts. Depositors with Premier Account balances of $1,000 or more receive unlimited tree use of services. Depositors with minimum balances of less than $1,000 pay a $20 a month service fee for their Premier Account.

FIB recently conducted an activity based costing study of its services. It assessed the following costs for six individual services. The use of these services in 2008 by three customers is as follows:

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Assume Robinson and Farrell always maintain a balance above $1,000, whereas Skerrett always has a balance below $1,000.

1. Compute the 2008 profitability of the Robinson, Skerrett, and Farrell Premier Accounts at FIB.

2. What evidence is there of cross subsidization among the three Premier Accounts? Why might FIB worry about this cross subsidization if the Premier Account product offering is profitable as a whole?

3. What changes would you recommend for FIB’s PremierAccount?