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Buckeye National Bank

In: Business and Management

Submitted By chaoskin
Words 1007
Pages 5
1. Under the original (old) cost system: a. Compute the single indirect cost allocation rate that the bank would use to allocate the total indirect costs presented in Exhibit B.
2850 / 95000 = $0.03

b. Use your answer to part A to determine the total annual indirect cost assigned to: i. The retail customer line, and
9500 * 0.03 = $285

ii. The business customer line. What drives theses allocations?
85500 * 0.03 = $2565 Paying checks which was processed

c. What proportion of the total indirect cost is assigned to: iii. The retail customer line, and iv. The business customer line? Why? That is, what is the underlying rationale for indirect cost allocation under the old system? What assumption must hold approximately true for the original cost allocation procedure to generate “accurate” customer cost information?

Retail line: $285 285 /(285+2565) =10%
Business line: $2565 2565 /(285+2565) =90%
Since the old indirect cost was allocated by paying checks, which was processed, and 90% of the checks wrote through business line, 90% indirect cost was allocated in Business line and 10% was allocated in retail line.

d. Use your answer to part B and data on the number of retail and business accounts to determine: v. The indirect cost per retail account, and vi. The indirect cost per business account

Retail: 285 / 150 (number of accounts) = $1.9
Business: 2565 / 50 = $51.3

e. Assuming there are no direct costs or other indirect costs, compute the average contribution to profit per account for retail customers and for business customers. What business strategy would a manager using the original cost allocation system likely adopt? Why?

Profit (retail): $10 - $1.9 = $8.1
Profit (Business): $40 - $51.3 = ($11.3)
Since business line reached a negative profit,

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