Question

Second Republic Bank is a lending company that operates in the Southeastern United States. Current economic conditions have kept lending rates low, which limits the revenue potential for Second Republic. The bank manager, Vivian Caldwell is concerned about understanding and then controlling costs, and she decided to try out time-driven ABC. As a pilot, she decided to focus on understanding the cost of taking a customer’s loan application. Vivian knew that it took longer to collect applicant information for a mortgage than it did for other types of loans, like auto loans or unsecured loans, but did not know the cost differences, so she collected the following information from a regional branch office.

There are two loan application specialists, each earning $129,600 per year. Vivian determined that fringe benefits average 20% of salary and that the office support costs for an employee (computer, office space, etc.) in that regional branch averaged $6,480 per employee. Factoring in time off for vacations, time spent on training, and other required tasks, each of the application specialists had 2,000 hours available to collect applicant information.

Required:

1. Determine the cost per minute available to collect loan applicant information.

2. Determine the average TDABC cost of collecting applicant information for each of the three types of loans.

Answer 1

Step-by-step explanation:

1. To determine the cost per minute available to collect loan applicant information, we need to calculate the total cost for the loan application specialists and divide it by the total minutes available. Here's the calculation:

Total cost for loan application specialists:

Annual salary per specialist = $129,600

Fringe benefits (20% of salary) = $25,920 (0.2 * $129,600)

Total annual cost per specialist = $129,600 + $25,920 = $155,520

Total cost for both loan application specialists = $155,520 * 2 = $311,040

Total minutes available for collecting applicant information per year:

Hours available per specialist = 2,000

Minutes available per specialist = 2,000 * 60 = 120,000

Total minutes available for both specialists = 120,000 * 2 = 240,000

Cost per minute available to collect loan applicant information:

Cost per minute = Total cost for specialists / Total minutes available

Cost per minute = $311,040 / 240,000

The cost per minute available to collect loan applicant information is $1.296 (rounded to three decimal places).

2. To determine the average TDABC cost of collecting applicant information for each type of loan, we need to consider the time taken by the loan application specialists for each loan type. Let's assume the time taken in minutes for each loan type:

- Mortgage loan: 120 minutes

- Auto loan: 60 minutes

- Unsecured loan: 30 minutes

Average TDABC cost for each loan type:

Mortgage loan cost = Cost per minute * Time for mortgage loan application

Mortgage loan cost = $1.296 * 120

Auto loan cost = Cost per minute * Time for auto loan application

Auto loan cost = $1.296 * 60

Unsecured loan cost = Cost per minute * Time for unsecured loan application

Unsecured loan cost = $1.296 * 30

Calculate the costs for each loan type using the given values:

Mortgage loan cost = $1.296 * 120 = $155.52

Auto loan cost = $1.296 * 60 = $77.76

Unsecured loan cost = $1.296 * 30 = $38.88

The average TDABC cost of collecting applicant information is $155.52 for a mortgage loan, $77.76 for an auto loan, and $38.88 for an unsecured loan.