COST MANAGEMENT

Assignment



Assignment

Requirement 1:

To the Board of CIT PLC Bank

The following report for the Board of CIT which contains clear recommendations on the steps that the bank should take in the future regarding its current customer groups. CIT plc is a bank that offers a variety of services to its clients. One of the services offered is aimed at high net worth and the bank is currently reviewing the performance of its client base. The high net worth clients are classified into four groups based on the value of their individual liquid assets deposited in CIT plc (Upchurch, 1998). The following annual budgeting information has been prepared:

Group

W

X

Y

Z

Total

Individual Value (€ '000's)

€ 500-€ 999

€ 1000-€ 2999

€ 3000-€ 5999

€ 6000-€ 9999

Number of Clients

1,000

1,500

2,000

1,800

6,300

Total Contribution (€ '000's)

500

900

1,400

2,500

5,300

0.5

0.6

0.7

1.388888889

Overheads

W

X

Y

Z

Total

Share of Support Costs

285

760

790

1,165

3,000

Share of Facility Costs

100

160

240

500

1,000

Profit\Loss

115

(20)

370

835

1,300

The low profitability from Client Group W and the losses from Client group X were investigated, in order to increase marketing and sales effort on increasing the number of clients within flourishing and performing groups (Theodore, 2009). CIT plc implemented activity based costing system (ABC) on its operations.

Two of the scenarios that came out during the investigation were analyzed and appraised. The results are provided below.

Scenario 1: Both the group W and Group X were abolished and all the focus was concentrated on Group Y and Group Z

Group

Y

Z

Individual Value (€ '000's)

€ 3000-€ 5999

€ 6000-€ 9999

Number of Clients

2500

2450

Total Contribution (€ '000's)

1750

3402.778

Overheads

Share of Support Costs

906

1,653

Share of Facility Costs

264

550

Profit\Loss

580

1,200

Grand Profit = 580 + 1200 = € 1780,000

Less Opportunity Cost for Group X and Group Y = 1780 - 115 - (-20) = € 1685,000

The result was great, as it produced far more profitability as compared to the original results. The original profitability was € 1300,000, and if scenario 1 is adopted it provided a profitability of € 1685,000, which is 385,000 more than the actual one (Staubus, 2002). The poor performing group removed has resulted in all the concentration towards the better performing groups and hence the result is superior.

There was another scenario which was analyzed. One by one Group W and Group Y was removed. The results are as under.

(With Group X Removed)

Group

W

Y

Z

Individual Value (€ '000's)

€ 500-€ 999

€ 3000-€ 5999

€ 6000-€ 9999

Number of Clients

1,000

625

612

Total Contribution (€ 000's)

500

438

850

Overheads

Share of Support Costs

285

227

413

Share of Facility Costs

108

259

540

Profit\Loss

107

(48)

(103)

Grand Profit = 107+ (-48) + (-103) = 44

Less Opportunity Cost for Group X = 44 - (- 20) = - € 24,000

(With Group W Removed)

Group

X

Y

Z

Individual Value (€ '000's)

€ 500-€ 999

€ 3000-€ 5999

€ 6000-€ 9999

Number of Clients

1,500

625

612

Total Contribution (€ '000's)

900

438

850

Overheads

Share of Support Costs

475

227

413

Share of Facility Costs

173

259

540

Profit\Loss

252

(48)

(103)

Grand Profit = 252+ (-48) + (-103) = 101

Less Opportunity Cost for Group W = 101 - 115 = - € 14, 000

The results clearly suggest if ...