You own a credit card company. You want to evaluate the profitability of two rep

Question

You own a credit card company. You want to evaluate the profitability of two representative customers, A and B. The numbers for customers A and B are as follows:

customer A customer B
credit card balance $1,500 $600
number of transactions 150 60
number of customer-support calls 60 3

Your revenues and costs for customers are as follows:
* Revenues: The only source of revenue is the interest you charge on credit card balances. You charge customers an interest rate of 10% (10% APR). So, if the credit card balance is $100, your revenue is $100*0.1=$10.
* Costs: based on the estimates from your ABC system, each transaction costs you $0.25, and each customer-support call costs you $2. Ignore all other costs.

Required:

a) compute the revenue you get from each customer, and the costs of serving each customer.

customer A customer B
Revenue $ _________ $ __________
Cost of transactions $ _______ $ __________
Cost of customer-support calls $___________ $ ___________

b) compute the profit margin for each customer.
If you get a negative number, enter it with a minus sign, i.e., enter negative $200 as -200 not ($200)
profit margin for A = $ _____________
profit margin for B = $ _____________

c) if you solved (a) and (b) correctly, one of the customers should be unprofitable. What should you do about this customer?

Explanation / Answer

a) customer A customer B Revenue $ 150 $ 60 Cost of transactions $ 37.5 $ 15 Cost of customer-support calls $120 $ 6 b)profit margin for A = -7.5$__________ profit margin for B = $ 39 c) Customer A is unprofitable because of high number of customer support calls required. The company should either get rid of this customer or figure out a way to serve him with low support calls such as online access etc.

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