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	$500	$200
number of transactions	50	20
number of customer-support calls	20	1

The only source of revenue from customers is the interest that you charge on credit card balances. You charge customers an interest rate of 20%. Thus, if the credit card balance is $1,000, revenue is $1000*0.2=$200. Variable costs are zero for simplicity. From your ABC system, the activity rates are $0.5 per transaction and $4 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)

"fire" the customerlimit the number of free customer-support callsyou 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.increase the interest rate

If you get rid of customer A, profit will:

increase by $5 in the long termremain the same in the long term decrease by $100 in the long termdecrease by $5 in the long term