Question 3: 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	$2,000	$800
number of transactions	200	80
number of customer-support calls	80	4

The only source of revenue from customers is the interest that you charge on credit card balances. You charge customers an interest rate of 30%. Thus, if the credit card balance is $1,000, revenue is $1000*0.3=$300. Variable costs are zero for simplicity. From your ABC system, the activity rates are $0.75 per transaction and $6 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). b) One of the customers is unprofitable. What can you do about this customer? (select all that apply)

increase the interest rate

"fire" the customer

you cannot do anything -- regardless of what you do, about 40-50% of your customers will be unprofitable. That is just the cost of doing business

limit the number of free customer-support calls

If you get rid of customer A, profit will:

remain the same in the long termincrease by $30 in the long term decrease by $600 in the long termdecrease by $30 in the long term