Question

Company 1 can enhance 60% of transactions and charge 8 cents per transaction. Company 2 can enhance 40% of transactions and charges 5 cents per transaction. Every phone call that deals with transaction confusion costs $15. Enhancement of transactions leads to a 2% decrease in phone call volume.

A. Which company should I go with?

B. If I had a budget of $100,000, would my answer change?

C. If I had a limited budget and limited transactions, which company should I go with?

Answer 1

Let's assume that the current transactions are X. The possible scenarios have been worked out with Co. 1 and Co. 2 in the following table:

		Co. 1	Co. 2
Cost / Transaction		0.08	0.05
Increase in no. of Transactions		0.6 X	0.4 X
Cost of Increase in Transactions		0.048 X	0.02 X
Reduction in Phone calls @	2%	0.012 X	0.008 X
Saving in Phone Calls @	15$	0.18 X	0.12 X
Net Saving		0.18 X - 0.048 X	0.12 X - 0.02 X
		0.132 X	0.1 X

Co. 1 increases the transactions by 60%, i.e. by 0.6 X, for which it charges 0.048 X (@ 8 cents per transaction). There is a 2% reduction in Phone Calls, i.e., by 0.012 X (2% of 0.6 X Transactions). The Saving in reduced Phone Calls, each call costing 15$, amounts to 0.18 X (=0.012 X x 15). The Net Saving with Co. 1 is 0.132 X (= 0.18 X - 0.048 X).

Similarly, if we go with Co. 2, the increase in transactions is by 40%, i.e. by 0.4 X, for which it charges 0.02 X (@ 5 cents per transaction). There is a 2% reduction in Phone Calls, i.e., by 0.008 X (2% of 0.4 X Transactions). The Saving in reduced Phone Calls, each call costing 15$, amounts to 0.12 X (=0.008 X x 15). The Net Saving with Co. 1 is 0.1 X (= 0.12 X - 0.02 X).

From the above, it is clear that whatever be the existing no. of transactions (X), the Net Benefit is more with Co. 1 (=0.132 X) as compared to Co. 2 (=0.1 X).

Hence it is better to go with Co. 1 if there are no constraints.

If transactions are not a constraint but the budget is a constraint, the answer would be different. Note that in case of Co. 1, the benefit of 0.132 X has been achieved by spending 0.048X; each Dollar spent leads to 2.75 $ Saving (=0.132 / 0.048). In case of Co. 2, each Dollar spent leads to 5 $ Saving (=0.1 / 0.02). The marginal productivity of each Dollar spent is higher for Co. 2. Therefore, if there was a limited budget available, Co. 2 is a better choice.

The answer would be the same if there was limited Budget and Limited Transactions - Co. 2 would be the preferred choice. This is so because Co. 2 not only has a higher marginal productivity (Benefit per Dollar spent), it achieves this with fewer transactions.