abc product costing at banks cross subsidization national sav 268561

ABC, product costing at banks, cross subsidization. National Savings Bank (NSB) 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. NSB 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, NSB would gain $60 on the interest spread if a depositor had an average Premier Account balance of $2,000 in 2011 ($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 free use of services. Depositors with minimum balances of less than $1,000 pay a $22 a month service fee for their Premier Account.

NSB 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 2011 by three customers is as follows:



Assume Holt and Graham always maintain a balance above $1,000, whereas Turner always has a balance below $1,000.

Required

1. Compute the 2011 profitability of the Holt, Turner, and Graham Premier Accounts at NSB.

2. Why might NSB worry about the profitability of individual customers if the Premier Account product offering is profitable as a whole?

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