Richman Savings Bank finds that its basic transaction account, which requires a $400 minimum balance, costs this savings bank an average of $2.65 per month in servicing costs (including labor and computer time) and $1.18 per month in overhead expenses. The savings bank also tries to build in a

Question

Richman Savings Bank finds that its basic transaction account, which requires a $400 minimum balance, costs this savings bank an average of $2.65 per month in servicing costs (including labor and computer time) and $1.18 per month in overhead expenses. The savings bank also tries to build in a $0.50 per month profit margin on these accounts. What monthly fee should the bank charge each customer?

Accepted Answer

Following the cost-plus-profit approach, the monthly fee should be:

Monthly fee = $2.65 + $1.18 + $0.50 = $4.33 per month.

Further analysis of customer accounts reveals that for each $100 above the $500 minimum in average balance maintained in its transaction accounts, Richman Savings saves about 5 percent in operating expenses with each account. (Note: If the bank saves about 5 percent in operating expenses for each $100 held in balances above the $500 minimum, then a customer maintaining an average monthly balance of $1,000 should save the bank 25 percent in operating costs.) For a customer who consistently maintains an average balance of $1,000 per month, how much should the bank charge in order to protect its profit margin?

The appropriate fee for this customer would be:

[$2.65 -0.25 ($2.65)] + $1.18 + $0.50 = $1.9875 + $1.18 + $0.50 = $3.6675 per month.

Question 12.P.6: Richman Savings Bank finds that its basic transaction accoun...

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