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?

Answer 1

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 profit	15,000

TM bank should offer these promotional accounts