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14-39  (40–60 min.) Customer profitability, credit  card operations.

1.

Customer

A

B

C

D

Customer revenues

Annual fee

Merchant paymentsa

$     50

1,600

$    0

520

$  50

680

$    0

160

Interest spreadb

    540

     0

 180

     9

    Total

 2,190

 520

 910

 169

Customer costs

Annual maintenance costs

Bad debt provisionc

Transaction costsd

108

400

400

108

130

260

108

170

136

108

40

100

Customer inquiriese

30

60

40

10

Card  replacementsf

        0

   240

 120

     0

Total

    938

  798

 574

 258

Customer operating income

$1,252

$(278)

$336

$ (89)

a 2% × $80,000; $26,000; $34,000; $8,000

b 9% × $6,000; $0; $2,000; $100

c 0.5% × $80,000; $26,000; $34,000; $8,000

d $0.50 × 800; 520; 272; 200

e $5 × 6; 12; 8; 2

f $120 × 0; 2; 1; 0

Note:  The above  analysis uses the average 0.5% bad debt provision.  Bay Bank may want to adjust individual customer-profitability reports at a subsequent date to reflect actual bad debt experience.

2.

Profitable

Customers

Unprofitable

Customers

Revenues

Fees

Merchant payments

Interest spread

Pays fee

High billings and high billings per transaction

High outstanding balance

Fee waived

Low billings and low billings per transaction

Pays on time and has no outstanding balance

Costs

Bad debt "provision"

Transaction costs

Customer inquiries

Card replacement

Pays account

Low number of transactions & high billings per

     transaction

Zero or few inquiries

No replacements

Defaults on account

High number of transactions & low billings per transaction

Many inquiries

Multiple replacements

14-58

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