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Hi, would you help me explain how to get the answer? I already read the answer scheme but still cannot understand it.
A bank has developed a new type of account called the Gold Account. Development and advertising costs were $50,000. At the start of each of the next four years, 1000 customers are expected to open a Gold Account and to pay the bank $300 each year that they use it. Of the 1000 customers who open a Gold Account, 500 are expected to close the account after one year and 500 after two years. The bank estimates it will cost $400 per customer to administer the Gold Account in the customer’s first year reducing to $50 per customer in the second year.
Ignoring the time value of money, what is the lifecycle profit per customer of Gold Account?
Answer is: $12.50
I presume it is:
1st year = 1000 customers $300 each so revenue of $300,000. The cost to administer the account in the first year is $400 per customer, so 400,000. Loss $100,000In the second year, 500 customers close their accounts, resulting in a revenue loss of $150,000 ($300 x 500).
The cost to administer the remaining 500 accounts is $50 per customer, $25,000. Therefore, the profit in the second year is $125,000 ($150,000 – $25,000).Adding the profit from the second year to the loss from the first year, the net profit per customer over the lifecycle of the Gold Account is $12.50 ($125,000 – $100,000) per customer.
did you get the $12.50 when divide the $25000 with 2000 customers? or other calculations? because looking at the scheme it showed divide with 4000 customers.
i am sorry for the confusion..
The question asks for the life-cycle profit per customer. Each customer only has the account open for either 1 or 2 years.
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