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IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector

A bank's retail lending unit prices a loan product using cost-plus. Fixed costs are ₹6 crore a year and variable cost is ₹400 per ₹1 lakh loan serviced annually. It expects 50,000 loans of ₹1 lakh each. The bank wants a 10% mark-up on full cost. What is the price per loan per year?

As written, the data produce a price of ₹13,640 per loan, which matches none of the listed options, so this question is flawed and should not be used in an examination.

  1. A₹1,320
  2. B₹1,760Correct
  3. C₹1,600
  4. D₹440
  5. ₹1,200

Explanation

Fixed cost per loan is ₹6 crore divided by 50,000, which is ₹60,00,00,000/50,000 = ₹12,000. Adding variable cost ₹400 gives ₹12,400, and 10% on top gives ₹13,640. None of the options match, so check the data: the fixed cost per loan ₹12,000 is much larger than the options, meaning the key cannot be derived.

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