Differential analysis

1.       TMBank’s management is evaluating the profitability of providing special Christmas Club accounts. The company’s financial analysts have developed the following cost information:

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

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


Should TMBank continue to offer these promotional accounts?


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