Enterprise Bank currently requires customers with checking accounts to

Question

Enterprise Bank currently requires customers with checking accounts to maintain a minimum balance or pay a monthly fee. Enterprise plans to offer accounts with no monthly fee and no minimum-balance requirement; to cover their projected administrative costs of $3 per account per month they plan to charge $30 for overdrawing an account. Since each month on average slightly more than 10 percent of Enterprise's customers overdraw their accounts, bank officials predict the new accounts will generate a profit.

Which of the following, if true, most strongly supports the bank officials’ prediction?

A. Some of Enterprise Bank's current checking account customers are expected to switch to the new accounts once they are offered.

B. One third of Enterprise Bank's revenues are currently derived from monthly fees tied to checking accounts.

C. Many checking account customers who occasionally pay a fee for not maintaining a minimum balance in their account generally maintain a balance well above the minimum.

D. Customers whose checking accounts do not have a minimum-balance requirement are more likely than others to overdraw their checking accounts.

E. Customers whose checking accounts do not have a minimum-balance requirement are more likely than others to write checks for small amounts.

(CR04882)

EMPOWERgmatVerbal · Accepted Answer

Enterprise Bank currently requires customers with checking accounts to maintain a minimum balance or pay a monthly fee. Enterprise plans to offer accounts with no monthly fee and no minimum-balance requirement; to cover their projected administrative costs of $3 per account per month they plan to charge $30 for overdrawing an account. Since each month on average slightly more than 10 percent of Enterprise's customers overdraw their accounts, bank officials predict the new accounts will generate a profit.

Which of the following, if true, most strongly supports the bank officials’ prediction?

A. Some of Enterprise Bank's current checking account customers are expected to switch to the new accounts once they are offered.

B. One third of Enterprise Bank's revenues are currently derived from monthly fees tied to checking accounts.

C. Many checking account customers who occasionally pay a fee for not maintaining a minimum balance in their account generally maintain a balance well above the minimum.

D. Customers whose checking accounts do not have a minimum-balance requirement are more likely than others to overdraw their checking accounts.

E. Customers whose checking accounts do not have a minimum-balance requirement are more likely than others to write checks for small amounts.

Analysis 
 BID (Boil It Down):  $30 overdraft rev -> Profit (over $3 expenses)

Big 3 GMAT Assumptions:

1. Success (The prediction is likely to be true/happen) - The overdraft fees WILL cover the admin expenses 
2. Relevance - N/A
3. No Other Factors - N/A

The Goal:   We need to find the option that helps to support the notion that the overdraft fees will be sufficient to cover the admin expenses.  This will likely be done by ruling out a compelling reason why the plan wouldn’t work.

Formal Argument Analysis:  
 Conclusion:  The new accounts, which require no minimum balance and have no monthly fee, will generate a profit.
 Evidence:  Slightly more than 10% of Enterprise’s customers overdraw their accounts, and they will be charged $30 when this happens. This will more than compensate for the $3/per account administrative costs.
 Assumption:   The people who choose the new, no-fee accounts will overdraw in sufficient numbers to raise enough money to offset the administrative costs.

Understanding the situation through a little Test It: 
Let’s say we’re talking about 100 of the new free accounts

Expenses  
$3 admin fee x 100 accounts:   $300/month  in admin expenses

Overdraft Fee Revenue  
 Number of overdraft accounts: 
10% of 100 accounts =  10 accounts/month

Revenue :
10 accounts x $30 fee =   $300/month in overdraft fee revenue

Choice D is correct, and is really compelling that the bank officials are correct. If it’s true that bank customers most likely to overdraw are those who open the new free accounts this tells us that there could be an even greater potential (beyond 10%) to generate the $30 overdraft fees thus helping to make these new free accounts profitable.

If that were true, check out our math above. If more than 10 accounts/month out of 100 overdraft, then the revenue is likely to exceed the $300/month in expenses.

If that were true, check out our math above. If more than 10 accounts/month out of 100 overdraft, then the revenue is likely to exceed the $300/month in expenses.

Choice A only tells us that “some” customers will switch to the new account, but how many? In any case, this choice does not tell us whether the new accounts will be profitable.

Choice B only tells us about the older account type. This is not relevant to the discussion of the new account’s profitability.

Choice C is wholly irrelevant to the discussion of the new account type because it is not clear how the behavior of holders of the current type of checking accounts will compare to those who open the new type of checking accounts. This is a great example of one of the biggest opportunities on the GMAT. Remember that you will be greatly rewarded by the test-writers if you can detect when options shift away from the subject discussed in the conclusion.

Choice E doesn’t affect the argument in a definite way. If anything, the small checks imply that the accounts will NOT be overdrawn, which would weaken the argument, but of course the accounts could still be overdrawn.

The Big Picture

1.  Detecting shifts in subject : here we’re greatly rewarded by paying very careful attention to the whether an option is referring to the current account type, or the new type. The test-writers LOVE to see who’s paying attention. By knowing to look out for these subject shifts, you’ll come out with a bigger score.

2.  Investing some time to understand the prompt & situation  - We never want to move into our option evaluation until we feel we’ve gained a confident understanding of the prompt. Because this question involves numbers and basic math, it’s helpful to get a sense of the numbers by Testing an easy to calculate scenario

SonalSinha803 · Answer

A. Some of Enterprise Bank's current checking account customers are expected to switch to the new accounts once they are offered. - irrelevant. Does not talk about overdrawing balance owing to revenue.

B. One third of Enterprise Bank's revenues are currently derived from monthly fees tied to checking accounts. - talks about monthly fees but not overdrawing balance. Irrelevant.

C. Many checking account customers who occasionally pay a fee for not maintaining a minimum balance in their account generally maintain a balance well above the minimum. - even if they maintain a balance above the minimum, we can't infer that they also overdraw money. A contender but a weak one. Keep this and move on.

D. Customers //whose checking accounts (do not) have a minimum-balance requirement// are //more likely than others to overdraw their checking accounts.// - strengthens the conclusion. If people whose account have no minimum balance requirements are more likely than others to oversee then, they will oversee money more number of times, thus paying $30 everytime. Thus, conclusion attend firm. Keep.

E. Customers whose checking accounts do not have a minimum-balance requirement are more likely than others to ((write checks for small amounts.)) - weakener.

Thus, between C and D, D stands out. D is thus, the best.

Sent from my Lenovo K53a48 using  GMAT Club Forum mobile app

US09 · Answer

IMO D.

If on an average more then 10% customers overdraw and the likelihood of customers who do not maintain minimum balance to overdraw is even higher, then the bank will surely make profits from these accounts.

AliciaSierra · Answer

Checking Account- Condition : maintain minimum balance or pay monthly fee.
Account Maintenance Cost: $3

Plan: Offer account without above condition
Problem: How to recover maintenance cost.
Solution: Apply fee on overdrawing of money.
Premise: currently more than 10% customer overdraw from account, so probability of success of plan is high.

Only option D supports the plan and banker's prediction.

aragonn · Answer

Pre-think: 
We need to strengthen BAnk official's prediction, which is new accounts will generate a profit. well this will happen if new account will generate revenue more than or equal to old account. This account is generating any money only when customers are overdrawing the funds. So bank officials are assuming that customers will keep overdrawing the funds and they will generate revenue. but if this is not true then this option will fall. So this assumption or something around it should be the answer.

Which of the following, if true, most strongly supports the bank officials’ prediction?

A. Some of Enterprise Bank's current checking account customers are expected to switch to the new accounts once they are offered. --- not affecting the conclusion.

B. One third of Enterprise Bank's revenues are currently derived from monthly fees tied to checking accounts. --- Cool sounds great but what about the rest. if you could not then you are at loss.

C. Many checking account customers who occasionally pay a fee for not maintaining a minimum balance in their account generally maintain a balance well above the minimum. ---- irrelevant

D. Customers whose checking accounts do not have a minimum-balance requirement are more likely than others to overdraw their checking accounts. --- On the lines of pre-thinking.

E. Customers whose checking accounts do not have a minimum-balance requirement are more likely than others to write checks for small amounts. --- irrelevant

jayarora · Answer

AkshdeepS · Answer

Can you explain more about C and D? I am not able to decipher how D is better than C.

Manukaran · Answer

Can someone explain this further. Why is it important that Customers whose checking accounts do not have a minimum-balance requirement are the ones who are more likely to overdraw their checking accounts?

How does it matter if any other customers (other than those who do not have a minimum-balance requirement) overdraw their checking accounts?

TaN1213 · Answer

To realize a profit,
SP> CP

Let the number of customers be n. Since $3 is required per account to maintain it,
CP = 3n

SP is $30 * (number of over drawing accounts)
SP = $30 * ( slightly more than 10% of n)
SP = slightly more than 3n

We,therefore, get SP>CP and hence a profit.

C doesn't talk about the number of overdrawn accounts. Only D does that.
--D--

However, I would like to know how is the number of accounts keeping a minimum amount linked to that of overdrawn accounts.

adkikani · Answer

manjot123   PeepalTree   nightblade354   VeritasKarishma   DavidTutorexamPAL

Does not (C) weaken the argument?

Prediction of bank officials: New accounts will generate more profits.
(y) Because slightly more than 10% of current customers overdraw their accounts
and EB charges $30 per account to each customer.
I need to support above prediction.

So existing customers will maintain a sufficient balance which is above the minimum.
Then how will EB charge them and earn a profit? This weakens the argument.

Let me put (D/E) together:

What is a subtle difference between D/E?
Is E incorrect because we do not know is small amount is less than minimum balance or not?

DavidTutorexamPAL · Answer

All good questions! Let's tackle them one by one:

The prediction is based on the fact that 10% of people currently overdraw their accounts each month - meaning the prediction assumes that this statistic will either stay the same or increase.
 (C) is actually irrelevant to the prediction: the prediction deals only with the profitability of the new account (which relies on overdrawing customers), whereas C is relevant to the old account (which relies on customer who don't maintain a minimum account.  
(interestingly, if the prediction were that the new profit would be greater than the original one - and not only that it will be positive - then C would be relevant, but it would strengthen the prediction, as it indicates that the current profit is not that great - the people who pay a fine only do so occasionally and not regularly).

The difference between D and E is a  crucial  one - 
one of them - D - predicts something that is relevant to the new charging system (overdrawing accounts, which this system fines), 
and the other - E - predicts something entirely irrelevant (writing small checks, which means nothing in the new system).

if the new system (no minimum) actually increases the likelihood that people will get fined (for having overdrawn accounts) - this is an excellent indication that the new account system will make a profit!

LoneSurvivor · Answer

I do not if you are still reading it, However If read the passage it says that overdrawing will cause the bank to make more money Which means only opting for the new bank accounts does not ensure that the customers will overdraw the money,they may or may not.

In option D the relationship has been clearly established .

goaltop30mba · Answer

I basically narrowed it down to a and d..

If any of the experts could confirm what I am about to say, that would mean a lot.

So a is basically an assumption right? W/o a, the argument falls apart, but then an assumption is necessary for the conclusion, not sufficient, well mostly.

On the other hand d is a as sufficient as it can get as it directly talks about increase overdrawing, which will lead to a profit.

GMATNinja   DavidTutorexamPAL

Posted from my mobile device

goaltop30mba · Answer

i meant a and d , have made the changes, please review the above  GMATNinja   DavidTutorexamPAL

1tach1 · Answer

My question is, the 'more than 10 people with 30$ fine is better than 100 people with $3 fine' logic makes sense only if all the people with old account switch to a new account. People with a new account are more likely to overdraw, but this will be profitable only if there are enough people who switch to or choose the new account type. I know that option A is vague, but we have to make a huge assumption with answer option D as well. Can someone explain why D should be chosen as the answer?

celan · Answer

Enterprise Bank currently requires customers with checking accounts to maintain a minimum balance or pay a monthly fee. Enterprise plans to offer accounts with no monthly fee and no minimum-balance requirement; to cover their projected administrative costs of $3 per account per month they plan to charge $30 for overdrawing an account. Since each month on average slightly more than 10 percent of Enterprise's customers overdraw their accounts, bank officials predict the new accounts will generate a profit.

Which of the following, if true, most strongly supports the bank officials’ prediction?

P : currently maintain a minimum balance or pay a monthly fee
P : New offer : no minimum balance and no monthly fee
P : charge $30 for overdrawing
P : 10% customers overdraw
 Supporting? Any statement that guarantees the size of customers who overdraw is enough will support. 
C : new policy will generate a profit

A. Some of Enterprise Bank's current checking account customers are expected to switch to the new accounts once they are offered.
-> not enough information to judge whether it is helpful or not.

B. One third of Enterprise Bank's revenues are currently derived from monthly fees tied to checking accounts.
-> Irrelevant, we are not interested in the source of the Bank's revenue.

C. Many checking account customers who occasionally pay a fee for not maintaining a minimum balance in their account generally maintain a balance well above the minimum.
-> Weaken, this statement implies that fewer people will overdraw.

D. Customers whose checking accounts do not have a minimum-balance requirement are more likely than others to overdraw their checking accounts.
-> Correct, this statement suggests that plenty of people will overdraw, thus making enough revenue to the Bank.

E. Customers whose checking accounts do not have a minimum-balance requirement are more likely than others to write checks for small amounts
-> Irrelevant, writing a check is not our interest.

RohitSaluja · Answer

Hi  goaltop30mba , not GmatNinja but I can try to help you. Option A tells us  "Some existing checking account customers are expected to switch to the new account"   Hmm, okay but this doesnot tells us anything about their behaviour on how they use their accounts, do they tend to overdraw or not , we dont know, banker's prediction will only come true, if amount of money generated by overdraft exceeds that of admin. costs. So keeping this in mind, this option is pretty irrelavant.

While option D cuts right at the heart and tells us how the customer might behave that is they are more likely to make overdrafts payments, hence this supports the prediction that bank might be able to generate the profit.

I hope that helps

BiBi072021 · Answer

Since each month on average slightly more than 10 percent of Enterprise's customers  (include customers with and without minimum-balance requirements)  overdraw their accounts, bank officials predict the new accounts will generate a profit . 
=> if D is true, then the customers  whose new accounts don't have a minimum-balance requirement  are more likely to overdraw their accounts => the figure is even  greater than 10% .

Hope that helps!

PranjalJ · Answer

Could someone please tell me where it is mentioned in Option D that those customers have the new account? 
I can only see that Option D talks about customers who have checking accounts. As per the passage, a checking account is different than the new account, which offers no fee and charges 30$ for overdrawing.

Enterprise Bank currently requires customers with checking accounts to

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Enterprise Bank currently requires customers with checking accounts to

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