Chemical Bank Case
Chemical Banks – Allocation of Profits
Question 1.
How will you resolve the due bill controversy?
Due Bill Controversy: Metro Division’s service to sell the Due Bill for the Treasury division is not recognized by the Treasury department. While Metro acted like a cost center, Treasury acted as profit center. When Metro Bank division reviewed the profit loss statement for the Due Bills, it was found that Metro division was incurring loss of $26.50 for each transaction.
Consequences of Due Bill Controversy: In order to increase the profitability of the metro division, super saver accounts were introduced by the Metro division and manager’s concentration shifted from Due Bill sales to super saver account. Also due to reduction in the interest rate of due bill, overall due bill says reduced and Chemical bank’s overall profit went down.
Options for resolving due bill controversy:
1. Transfer pricing from Treasury to the Metro bank for the Due Bill sales
2. Changing the responsibility of administration from T&I to the Treasury department due to the available capacity
If we increase the Processing Fee to a higher rate as proposed by the Metro Bank, the attractiveness of T-Bills as investments will be reduced and this will have impact in the volume.
Calculations
Responsibility transfer
- Transfer the processing expense from T&I to Treasury. Transferring Due Bill processing from T&I to Treasury will reduce the Processing Expense from $ 22 to $ 20.
Variable Processing Cost Treasury
90,000
Overhead 1,010,000
Total 1,100,000
Process Expense/55000 Transaction 20
Note: Transactions calculated as estimated by the financial department for the year 1982
Transfer Pricing
- Fee Revenue will be split between Metro ($5) & Treasury ($20)
Reasons:
1) This will give a +ve Pretax Profit for Metro and increase the company Pretax Profit by 3%.
Below table will explain the NEBT Proposed, Current and Variance.
Revenues
Metro
T&I
Treasury
Total Chemical
Question 1.
How will you resolve the due bill controversy?
Due Bill Controversy: Metro Division’s service to sell the Due Bill for the Treasury division is not recognized by the Treasury department. While Metro acted like a cost center, Treasury acted as profit center. When Metro Bank division reviewed the profit loss statement for the Due Bills, it was found that Metro division was incurring loss of $26.50 for each transaction.
Consequences of Due Bill Controversy: In order to increase the profitability of the metro division, super saver accounts were introduced by the Metro division and manager’s concentration shifted from Due Bill sales to super saver account. Also due to reduction in the interest rate of due bill, overall due bill says reduced and Chemical bank’s overall profit went down.
Options for resolving due bill controversy:
1. Transfer pricing from Treasury to the Metro bank for the Due Bill sales
2. Changing the responsibility of administration from T&I to the Treasury department due to the available capacity
If we increase the Processing Fee to a higher rate as proposed by the Metro Bank, the attractiveness of T-Bills as investments will be reduced and this will have impact in the volume.
Calculations
Responsibility transfer
- Transfer the processing expense from T&I to Treasury. Transferring Due Bill processing from T&I to Treasury will reduce the Processing Expense from $ 22 to $ 20.
Variable Processing Cost Treasury
90,000
Overhead 1,010,000
Total 1,100,000
Process Expense/55000 Transaction 20
Note: Transactions calculated as estimated by the financial department for the year 1982
Transfer Pricing
- Fee Revenue will be split between Metro ($5) & Treasury ($20)
Reasons:
1) This will give a +ve Pretax Profit for Metro and increase the company Pretax Profit by 3%.
Below table will explain the NEBT Proposed, Current and Variance.
Revenues
Metro
T&I
Treasury
Total Chemical