Question

Evaluating customer profitability

You own a credit card company. You want to evaluate the profitability of customers A and B.

	customer A	customer B
credit card balance	$1,000	$400
number of transactions	100	40
number of customer-support calls	40	2

The only source of revenue from customers is the interest that you charge on credit card balances. You charge customers an interest rate of 10%. Thus, if the credit card balance is $1,000, revenue is $1000*0.1=$100.
Variable costs are zero for simplicity. From your ABC system, the activity rates are $0.25 per transaction and $2 per customer-support call.

a) Compute revenue, costs, and profit margin for each customer.

	customer A	customer B
Revenue	$	$
Variable costs	$	$
Contribution margin	$	$
Allocated costs - transactions	$	$
Allocated costs - customer support	$	$
Profit margin	$	$

Enter negative numbers with a minus sign, i.e., a loss of $200 should be entered as -200, not as (200) or ($200).

Answer 1

• All working forms part of the answer
• Answer

	Customer A	Customer B
Revenue	$             100.00	$              40.00
Variable costs	$                    -	$                   -
Contribution margin	$             100.00	$              40.00
Allocated costs - transactions	$               25.00	$              10.00
Allocated costs - customer support	$               80.00	$               4.00
Profit margin	$ - 5.00 [minus $ 5]	$              26.00
	(above is negative figure)

• Working

	Customer A	Customer B
Revenue	=1000 x 10%	=400 x 10%
Variable costs	0	0
Contribution margin	=100-0	=40-0
Allocated costs - transactions	=100 x 0.25	=40 x 0.25
Allocated costs - customer support	=40 x 2	=2 x 2
Profit margin	=100-25-80	=40-10-4