Pilgrim Bank (A): Customer Profitability

How much do profits vary across customers?

Are online customers more profitable than offline customers?

What is the role of customer demographics in comparing online and offline profitability?

What is your recommendation to the senior management team in terms of Pilgrim Bank’s online channel pricing strategy?

Should the bank charge fees, offer rebates, or do nothing in regards to pricing for online channel use? Why?

Case

Assume that the new entity, AMT, was established, that the board accepted Helen Grant’s recommendation of an annual audit for the company, and that after conducting a tender for the audit, AMT selected ABC Auditors (ABCA) to conduct the audit. Unfortunately, Helen Grant found that, for personal reasons, she was unable to continue in the new role as CFO. The case continues…

ABCA was selected to conduct the audit because one of the board members of AMT was aware of its reputation as an auditor in the wine industry where he was involved in a joint venture (a small winery) with one of the partners of AMT.

In the year first year of operation AMT made large investments in state-of-the–art computer aided manufacturing equipment, obtained licenses to use the latest software programs, and significantly increased its research and development capability. It funded this expansion through a number of bank loans and a bank overdraft. In order to minimise risk, the board of AMT accepted a proposal from one of its major customers for a seat on the board in return for signing a 5 year contract to purchase one of AMT’s main products a set price. As well, AMT sought to optimise operating cash flow by reducing executives’ base salaries and increasing the amount of bonuses that they could earn. The key performance indicator on which bonuses are to be calculated is accounting profit.

AMT has 3,600 active customers located across Australia. All sales are on credit, with outstanding accounts due within 30 days. Customers who pay within 7 days are given a 2% discount. Approximately 30% of customers represent 70% of the accounts receivable balance at year end.

In recent months, the Australian Dollar depreciated 35 % against the $US, which has made some of, AMT’s inputs more expensive. Furthermore, rising interest rates in the Australian economy are putting pressure on some of AMT’s major customers. Consequently, the new CFO, who joined AMT after many years in the building industry, is closely monitoring receivables.

The total balance of outstanding amounts owing from customers at balance date is $90m, for which the new CFO made a provision for doubtful debts of $450,000. She based this figure based on her reading of the records that Helen Grant kept while she was the senior accountant at AM.

Question

1. With reference to the facts of the case, identify three inherent risk factors that may because concern when planning the audit of AMT. Ensure these risks are specific to AMT and classify them as either a financial report level risk or an assertion level risk.

2. Explain why the risk factors in (a) above are potential problems for the audit. That is, why could these factors increase the risk of misstatement in the financial statements of AMT?

(c)   For each of the three risks you have identified, state one significant Balance Sheet account that could at risk of material misstatement because of risk. For each account you have identified, provide a brief explanation of why it is a risk and identify the key assertions affected.

1. In a study designed to measure various aspects of multicultural sensitivity, simple random samples of 15 male and 15 female clinical psychologists were given several tests. On one of the tests, the two sets of sample scores were:

         Male Female

63      58

71      62

68      65

60      63

69      62

70      58

69      62

72      66

69      60

63      61

58      60

65      70

65      64

70      67

74      63

Do these scores indicate a difference between men and women with respect to this aspect of multicultural sensitivity? Begin by identifying a statement to be tested, the random variable(s) involved and any assumptions you make about them, level of significance, the statistical hypotheses to be tested, the test statistic and critical region. Then, either by hand or using SPSS (provide all SPSS output you use), do the hypothesis test, make a decision about the hypotheses, and draw conclusions as to whether there are differences based on gender.

1. You are a researcher employed in the Ministry of Gender, Youth and Child Development and you have been asked to explore the following research question: “Which gender earns more in the Trinidad and Tobago economy.” Describe how you will attempt to research this question making sure to select and justify your choice of an appropriate measure of central tendency?

2. Identify the difference between quartiles and percentiles, as measures of position.

a. Quartiles divide a dataset into how many equal parts?
b. The median is equal to which quartile?
c. Percentiles divide a dataset into how many equal parts?

3. An automobile rental agency has the following mileage data for a simple random sample of 20 cars that were rented last year.

55 33 65 67 69 37 88 82 39 60
54 45 74 92 59 55 38 59 29 72

a. Compute the sample mean for this dataset.
b. Compute the sample standard deviation for this dataset.

The manufacturer of hardness testing equipment uses​ steel-ball indenters to penetrate metal that is being tested.​ However, the manufacturer thinks it would be better to use a diamond indenter so that all types of metal can be tested. Because of differences between the two types of​ indenters, it is suspected that the two methods will produce different hardness readings. The metal specimens to be tested are large enough so that two indentions can be made.​ Therefore, the manufacturer uses both indenters on each specimen and compares the hardness readings. Construct a​ 95% confidence interval to judge whether the two indenters result in different measurements. ​Note: A normal probability plot and boxplot of the data indicate that the differences are approximately normally distributed with no outliers.

Is there a correlation between the two bowlers themselves? In other words – does Aron’s score in each game depend on Mjorgan’s score at all? You might want to create a data table of each bowler’s score in each respective game to find out. Develop a statistical model to estimate Aron’s score based on Mjorgan’s score, then interpret its findings and its accuracy.

You have an exclusive contract to supply oranges to Juice&Co. and you are expected to deliver 10,000 oranges in one year from now at the market price in place at that time. Your production cost to farm and harvest the 10,000 oranges will be $2,000 in one year. Today’s market price for one orange is $0.52. Assume that the continuously compounded risk free interest rate is 6%..

You expect the price of oranges to be between $0.50 and $0.55 next year, and you have decided to hedge your risk using one year European options: you buy 10,000 put options with strike price $0.52 for $84 (per option) and sell 10,000 call options with strike price $0.54 for $74 (per option).

1. a) What is the total cost of your options portfolio?

2. b) Determine the range of possible net profits you can get from your supply contract and

   options portfolio one year from now. Show your work in detail.

Thomas’ manager has a deal with his employees that he will buy lunch on Friday for the highest weekly performer on his team if that employee wins at least two out of three coin flips. If the highest performer loses at least two out of three coin flips, then that employee has to buy lunch for the manager. To perform the three flips, three quarters are flipped simultaneously, so everyone gets to see three outcomes (heads or tails) each time. In 40 weeks, the manager has won the flips 27 times and Thomas suspects that the quarters being used are unfair as a result. He never trusted his manager, so he’s been keeping track since the first contest, and he has tracked the following results over the 40 weeks:

If the quarters were fair, then that would mean that n_heads comes from a binomial distribution with p = 0.5 (and number of trials = 3 – note that number of trials is a fixed parameter for the binomial, not an estimated parameter, so it doesn’t affect the degrees of freedom for the chi-squared test).

Using a chi-squared test for goodness of fit, can we say with 95% confidence that the quarters are unfair (i.e., that these results do not come from a binomial distribution with p=0.5)?

Can we say with 90% confidence that the quarters are unfair?

Third, the researcher wishes to use numerical descriptive measures to summarize the data on each of the two variables: hours worked per week and income earned per year.

(a) Prepare and display a numerical summary report for each of the two variables including summary measures such as mean, median, range, variance, standard deviation, smallest and largest values and the three quartiles.

Notes: Use QUARTILE.EXC command to generate the three quartiles.

Data for HOURSWORKED63 Excel spreadsheet is below:

KC Marketing (KC) makes the following specialized campaigns for its customers:

KC will prepare a TV commercial for $1.5M, an app for $500K, and a Facebook page for $500K. The TV commercial, the app, and the Facebook page are not interrelated. If a customer purchases all items, the total cost is $1.5M, which the customer will pay upon signing the contract. Furthermore, only and only if the app is downloaded more than 10,000 times in the first month, KC will receive a one-time bonus of $100K. The agreement creates enforceable rights and obligations. Before the end of the fiscal quarter, the app was actually downloaded more than 10,000 times in the first month. How much revenue will KC allocate to the TV commercial?