Customer profitability analysis. FirstBank's management is evaluating the profitability of providing special checking accounts to college students in the college town of Lofty Ideas. The company's financial analysts have developed the following cost information:
Cost to Acquire Special College Student Accounts, Including
Advertising and Account Setup Costs $180,000 per year
Cost to Process Transactions and Service These Accounts $150 per account per year
On average, each account generates $170 per year in fees and interest.
After inquiring whether the costs above are all differential, you learn that the $180,000 per year cost to acquire accounts includes $20,000 of advertising that FirstBank would have done with or without college student accounts. The remainder of the $180,000 costs are differential. Further, you learn that $10 of the $150 to process and service accounts are general office costs allocated to these accounts, which are incurred whether or not the bank has the special college student accounts.
The bank has an average of 7,000 special college student accounts each year. Should FirstBank continue to offer these accounts?