Buckeye National Bank

Prof. S. Sridharan

Assignment questions:

1. What is the nature of the industry and the business?

2. What are the major customer groups that the Bank has chosen to focus on?

3. Determine the impact of the Banks business strategy on its financials.

4. Using the traditional accounting system, what are the costs of servicing an average retail
and business customer? Also, determine the profit per customer in each of the two
groups.

5. What are the major cost pools the Bank has identified under the new Activity-based
costing system? What transactions are used to absorb the cost of each activity at a given
customer group level?

6. Using the Activity-based costing (ABC) system, what are the costs of servicing an average
retail and business customer? Also, determine the profit per customer in each of the two
groups.

7. Reconcile the differences, if any, between the ABC and the traditional views of
profitability of an average customer in the two groups.

Additional Assignment Questions on Customer Acquisition, Attrition,

Outsourcing and Strategic Customer Groups Management
8. Assume that the depreciation expense on the customer call center equipment is $40,000.
An outsourcing company offers to provide the same level (i.e., attending 100,000 calls a
year) and quality of service for $480,000. Should the bank outsource its call center
 service? You may ignore the qualitative and long-term concerns related to outsourcing
and view this as a single-shot decision.

9. Suppose that the variable portion of servicing one retail customer is $4 (under the new
Activity-Based-Costing system). If the bank responds to the new customer profitability
numbers by letting one retail customer go, by how much would its total income for the
year increase?

10. Suppose there is some excess capacity and the business customers group manages to
increase its customer base by another 1,000 new accounts. What would that do to the
perceived profitability of a retail customer?

11. Suppose that the Chief Marketing Officer of the Bank has one million dollar budget for
promoting new customer base. Assume that acquiring a new business customer would
cost $100 on an average, whereas acquiring a new retail customer would involve a cost of
$20. Assume that the variable portion of servicing a retail and a business customer is $4
and $20, respectively. Further assume that the Bank has sufficient excess capacity to
service all the new customers. Moreover, assume for the purpose of this calculation, that
once a customer is acquired, she/he will stay with us for the next 10 years. Assuming a
discount rate of 8%, determine the optimal allocation of the CMO's marketing dollars in
promoting retail versus business customers.

12. Assume the same set of facts as in (11) above, with the only difference that once a
customer is acquired, the chances of attrition are 10% for each one of the subsequent ten
years. Again, assuming a discount rate of 8%, determine the optimal allocation of the
CMO's marketing dollars in promoting retail versus business customers.