BPP Page 133 Qn 365 — OpenTuition Forums

SSruthi5y ago

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 = 1200000 I am not getting the answer as in BPP. Sir, Please advise.

John MoffatAdmin5y ago#1

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.

SSruthi5y ago#2

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 !!!

SSruthi5y ago#3

misunderstood*

John MoffatAdmin5y ago#4

You are welcome :-)

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