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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, 1,000
customers are expected to open a Gold Account and to pay the bank $300 each year that
they use it. Of the 1,000 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?
Cost : $ 50000+4000(1000*4)*400+2000(500*4)*350 = $2350000
Revenue : 4000*300 = 1200000I am not getting the answer as in BPP. Sir, Please advise.
In the first year there will be a 1,000 new customers of whom 500 stay for a second year.
Those initial 1,000 customers cost the bank 1,000 x ($300 – $400) = $100,000 in the first year, and earn the bank 500 x ($300 – $50) = $125,000 in the second year.
So in total they earn the bank 125,000 – 100,000 = $25,000.This happens 4 times and so the total earnings are 4 x $25,000 = $100,000.
There are advertising costs of $50,000 and so the total profit over the four years is 100,000 – 50,000 = $50,000.In total there are 4 x 1,000 = 4,000 customers. So the profit per customer is $50,000 / 4,000 = $12.50.
Thanks a lot sir..I understood the concept of reduction to $50 as the administering cost of accounts for the second year by company and hence wrongly considered a cost.. Now got that its a revenue from customer…Thanks a lot sir !!!
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