Problem 12 Deposit Pricing Solution (1) Marquette University FINA 3002
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Course
FINA 3002
Institution
FINA 3002
FINA 3002 Introduction to Commercial Banking
Problem 12
Deposit Pricing
Name: ___________________________________________________
Date: ____________________________________________________
R&R Savings Bank finds that its basic transaction account, which requires a $1,000 minimum
balance, cost...
R&R Savings Bank finds that its basic transaction account, which requires a $1,000 minimum
balance, costs this savings bank an average of $3.25 per month in servicing costs (including
labor and computer time) and $1.25 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?
Further analysis of customer accounts reveals that for each $100 above the $1,000
minimum in average balance maintained in its transaction accounts, R&R 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 $1,000 minimum, then a customer
maintaining an average monthly balance of $1,500 should save the bank 25 percent in operating
costs.)
Based upon these numbers, what balance level, maintained by the customer, would the
bank consider no charge to the customer, in other words, break-even?
To Break even = 3.25 – (x% - 3.25) + 1.25 + .50 = $0
Therefore
3.25 – (x% x 3.25) = 1.75
3.25 – (x% x 3.25) = (1.75), + 1.75, = 0
5..25 = 153.85% upcharge from operating costs (Markup)
153.85% / 5% savings per $100 = 30.77 increments of $100
30.77 x $100 = $3,077
$3,077 + $1,000 = $4,077 balance needed to break even
Proof
o 3.25 – (153.85% x 3.25) + 1.25 + .50 = $0, or
o 3.25 – 5.00 + 1.25 + .50 = 0, or
o Cost of account per month = $5.00 (at $1,000 balance)
o Savings with higher balances = ($5.00), $3.25 x 153.85%
o = $0, or breakeven
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