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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, 1000 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?Sir correct ans is 12.5 but please can you explain me
In the first year there are 1,000 Gold customers and they lose the bank 400 – 300 = 100 each. So the bank loses a total of 100,000.
In the second year there are left 500 Gold customers, and they gain the bank 300 – 50 = 250 each, so the bank gains a total from them of 250 x 500 = 125,000.
Therefore the lifecycle profit per customer is (125,000 – 100,000) / 1,000 = 12.50.
Sir in the above calculation , you have first calculated loss in first year and then you have calculated gain in second year, correct? But why you have not calculated till 4 years in order to calculated lifecycle revenue and life cycle cost and hence lifecycle profit?
Secondly why we are not considering advertisement expenditure?
The question asks for the life-cycle profit per customer. Each customer only has the account open for either 1 or 2 years.
Advertising is a sunk cost and is not relevant.
Even in lifecycle costing we will not consider irrelevant cost? we will only consider relevant cost?
Sorry to interrupt sir,but life cycle costing includes every cost from the beginning to the end of the product so why should not we include it even if it is sunk cost.The BPP kit also has considered it.Sorry for the interruption again .Just want to understand the concept.
In this question only in the kit if u see the solution they have deducted the dev and advertisement cost for from the gains to arrive at profit.Though you have done calculation on 2 years basis,in the kit the calculation is on 4 years .But that part is ok.I just have the problem with dev and advertisement cost.
Other problem which considers it is
Question no .56 of the kit new edition.it has research and dev.costs which is considered as well.max popper asked me where 12.50 cost per customer came from and I answered. I do not know which question it is in the book or what the actual question required.
Q56 correctly includes all costs over the lifetime of the product as I explain in my free lectures.
OK. And the answer explains how the $12.50 is arrived at, so I do not understand your problem.
Just that you said that development cost should not be considered in life cycle costing but they have considered it .Just wanted to confirm that part.Thanks.
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