Differential analysis

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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


Should TMBank continue to offer these promotional accounts?

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