Customer profitability analysis. TMBank’s management is evaluating the profitabi
ID: 2605675 • Letter: C
Question
Customer profitability analysis. TMBank’s management is evaluating the profitability of providing special Christmas Club accounts. The company’s financial analysts have developed the following cost information:
Cost to Acquire New Christmas Club Accounts, Including Advertising and Account Setup Costs
$100,000 per year
Cost to Process Transactions and Service These Accounts
$50 per account per year
On average, each account generates $75 per year in fees and interest. After inquiring whether the costs above are all differential, you learn that the $100,000 per year cost to acquire accounts includes $10,000 of advertising that TMBank would have done with or without the new accounts. The remainder of the $100,000 costs are differential. Further, you learn that $5 of the $50 to process and service accounts are general office costs allocated to these accounts, which are incurred whether or not the bank has the new accounts. The bank has an average of 3,500 new Christmas Club accounts each year.
Required:
Should TMBank continue to offer these promotional accounts?
Cost to Acquire New Christmas Club Accounts, Including Advertising and Account Setup Costs
$100,000 per year
Cost to Process Transactions and Service These Accounts
$50 per account per year
Explanation / Answer
15,000
TM bank should offer these promotional accounts
New accounts per year 3,500 Revenue per account 75 incremental costs 45 incremental revenue 30 total incremental revenue 1,05,000 less: incremental advt costs 90,000 incremental net profit15,000
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