Question Description

1.       TMBank’s management is evaluating the profitability of providingspecial Christmas Club accounts. The company’s financial analysts havedeveloped the following cost information:

Cost to Acquire New Christmas Club Accounts, IncludingAdvertising and Account Setup Costs

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$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 andinterest. After inquiring whether the costs above are all differential, youlearn that the $100,000 per year cost to acquire accounts includes $10,000 ofadvertising that TMBank would have done with or without the new accounts. Theremainder of the $100,000 costs are differential. Further, you learn that $5 ofthe $50 to process and service accounts are general office costs allocated tothese accounts, which are incurred whether or not the bank has the newaccounts. The bank has an average of 3,500 new Christmas Club accounts eachyear.

Required:

Should TMBank continue to offer these promotional accounts?

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