Differential Costing
As pointed out earlier in “Here’s the Real Kicker,” Kicker changed banks a couple of years ago because the loan officer at its bank moved out of state. Kicker saw that as an opportunity to take bids for its banking business and to fine-tune the banking services it was using. This problem uses that situation as the underlying scenario but uses three banks: FirstBank, Community Bank, and RegionalOne Bank. A set of representative data was presented to each bank for the purpose of preparing a bid. The data are as follows:
Checking accounts needed: 6
Checks per month:* 2,000
Foreign debits/credits on checking accounts per month: 200
Deposits per month:* 300
Returned checks:* 25 per month
Credit card charges per month: 4,000
Wire transfers per month: 100, of which 60 are to foreign bank accounts
Monthly credit needs (line of credit availability and cost): $100,000 average monthly usage
*These are overall totals for the six accounts during a month.
Internet banking services?
Knowledgeable loan officer?
Responsiveness of bank?
FirstBank Bid:
Checking accounts: $5 monthly maintenance fee per account
$0.10 foreign debit/credit
$0.50 earned for each deposit
$3 per returned check
Credit card fees: $0.50 per item
Wire transfers: $15 to domestic bank accounts, $50 to foreign bank accounts
Line of credit: Yes, this amount is available,
interest charged at prime plus 2%,
subject to a 6% minimum interest rate
Internet banking services? Yes, full online banking available:
$15 one-time setup fee for each account
$20 monthly fee for software module
The loan officer assigned to the potential Kicker account had 10 years of experience with medium to large business banking and showed an understanding of the audio industry.
Community Bank Bid:
Checking accounts: No fees for the accounts, and no credits earned on deposits
$2.00 per returned check
Credit card fees: $0.50 per item,
$7 per batch processed. Only manual processing was available, and
Kicker estimated 20 batches per month
Wire transfers: $30 per wire transfer
Line of credit: Yes, this amount is available:
interest charged at prime plus 2%
subject to a 7% minimum interest rate
Internet banking services? Not currently, but within the next 6 months
The loan officer assigned to the potential Kicker account had 4 years of experience with medium to large business banking, none of which pertained to the audio industry.
RegionalOne Bank Bid:
Checking accounts: $5 monthly maintenance fee per account to be waived for Kicker
$0.20 foreign debit/credit
$0.30 earned for each deposit
$3.80 per returned check
Credit card fees: $0.50 per item
Wire transfers: $10 to domestic bank accounts, $55 to foreign bank accounts
Line of credit: Yes, this amount is available:
interest charged at prime plus 2%
subject to a 6.5% minimum interest rate
Internet banking services? Yes, full online banking available:
one-time setup fee for each account waived for Kicker
$20 monthly fee for software module
The loan officer assigned to the potential Kicker account had 2 years of experience with large business banking. Another branch of the bank had expertise in the audio industry and would be willing to help as needed. This bank was the first one to submit a bid.
Required:
- 1. Calculate the predicted monthly cost of banking with each bank. Round answers to the nearest dollar.
- 2. CONCEPTUAL CONNECTION Suppose Kicker felt that full online Internet banking was critical. How would that affect your analysis from Requirement 1? How would you incorporate the subjective factors (e.g., experience, access to expertise)?
1.
Calculate the predicted monthly cost of banking for each bank.
Explanation of Solution
Cost:
Cost can be defined as the cash and cash equivalent which is incurred against the products or its related services which will benefit the organization in the future.
The following table represents the predicted monthly cost of banking for Bank F:
Cost | Amount ($) | Amount ($) |
Checking accounts: | ||
Maintenance fees1 | 30 | |
Foreign debit/credit2 | 20 | |
Returned checks3 | 75 | |
Earnings on deposits4 | (150) | (25) |
Credit card fees5 | 2,000 | |
Wire transfers6 | 3,600 | |
Line of credit charges7 | 500 | |
Internet banking charges | 20 | |
Total monthly charges | 6,095 |
Table (1)
The total amount of monthly charges of Bank F is $6,095.
The following table represents the predicted monthly cost of banking for Bank C:
Cost | Amount ($) | Amount ($) |
Checking accounts: | ||
Returned checks8 | 50 | |
Credit card fees: | ||
Per item9 | 2,000 | |
Batch processing10 | 140 | 2,140 |
Wire transfers11 | 3,000 | |
Line of credit charges12 | 583 | |
Total monthly charges | 5,773 |
Table (2)
The total amount of monthly charges of Bank C is $5,773.
The following table represents the predicted monthly cost of banking for Bank R:
Cost | Amount ($) | Amount ($) |
Checking accounts: | ||
Foreign debit/credit13 | 40 | |
Returned checks14 | 95 | |
Earnings on deposits15 | (90) | 45 |
Credit card fees16 | 2,000 | |
Wire transfers17 | 3,700 | |
Line of credit charges18 | 542 | |
Internet banking charges | 20 | |
Total monthly charges | 6,307 |
Table (3)
The total amount of monthly charges of Bank R is $6,307.
Therefore, Bank C has the lowest overall monthly charges that is $5,773.
Working Notes:
1. Calculation of maintenance fees of Bank F:
Hence, the amount of maintenance fees is $30.
2. Calculation of foreign debit/credit amount for Bank F:
Hence, the foreign debit/credit amount is $20.
3. Calculation of returned checks for Bank F:
Hence, the amount of returned checks is $75.
4. Calculation of earnings on deposits for Bank F:
Hence, the amount of earnings on deposits is $150.
5. Calculation of credit card fees Bank F:
Hence, the amount of credit card charges is $2,000.
6. Calculation of wire transfers for Bank F:
Hence, the amount of wire transfers is $3,600.
7. Calculation of line of credit charges Bank F:
Hence, the amount of line of credit charges is $500.
8. Calculation of returned checks for Bank C:
Hence, the amount of returned checks is $50.
9. Calculation of credit card fees per item for Bank C:
Hence, the amount of credit card charges is $2,000.
10. Calculation of credit card fees of batch processing for Bank C:
Hence, the amount of credit card charges is $140.
11. Calculation of wire transfers for Bank C:
Hence, the amount of wire transfers is $3,000.
12. Calculation of line of credit charges Bank C:
Hence, the amount of line of credit charges is $583.
13. Calculation of foreign debit/credit amount for Bank R:
Hence, the foreign debit/credit amount is $40.
14. Calculation of returned checks for Bank R:
Hence, the amount of returned checks is $95.
15. Calculation of earnings on deposits for Bank R:
Hence, the amount of earnings on deposits is $90.
16. Calculation of credit card fees Bank R:
Hence, the amount of credit card charges is $2,000.
17. Calculation of wire transfers for Bank R:
Hence, the amount of wire transfers is $3,700.
18. Calculation of line of credit charges Bank R:
Hence, the amount of line of credit charges is $542.
2.
Describe the effect of internet banking on the analysis. Also, describe how to incorporate subjective factors.
Explanation of Solution
If the internet banking is a crucial factor, then Bank C will be eliminated because it does not offer internet banking. Person K will not consider Bank C as an appropriate bank. The monthly cost of Bank F is slightly different from that of Bank R. Therefore, Person K’s deciding factors will be the ability of the bank officers to respond quickly and their expertise in granting loan. If any of the banks satisfy the needs of Person K, then it will be selected.
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Chapter 8 Solutions
EBK MANAGERIAL ACCOUNTING: THE CORNERST
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