**Question 3: Evaluating Customer Profitability****Scenario:**You own a credit card company and 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 charged on credit card balances at a rate of 40%. - Variable costs are zero for simplicity. The activity rates are $1 per transaction and $8 per customer-support call.**Instructions:**a) **Compute Revenue, Costs, and Profit Margin for Each Customer:**- **Revenue Calculation**: - Revenue for Customer A: $800 (40% of $2,000 balance) - Revenue for Customer B: $320 (40% of $800 balance)- **Cost Calculation**: - **Allocated Costs for Transactions**: - Customer A: 200 transactions x $1 = $200 - Customer B: 80 transactions x $1 = $80 - **Allocated Costs for Customer Support**: - Customer A: 80 calls x $8 = $640 - Customer B: 4 calls x $8 = $32- **Profit Calculation**: - **Contribution Margin** (Revenue minus Variable Costs): - Same as Revenue since Variable Costs are zero. - **Profit Margin**: - Customer A: $800 - ($200 + $640) = -$40 - Customer B: $320 - ($80 + $32) = $208b) **One of the Customers is Unprofitable. What Can You Do About This Customer?**- Options (Select all that apply): - [ ] "Fire" the customer - [x] Increase the interest rate - [ ] You cannot do anything; about 40-50% of your customers will be unprofitable. - [ ] Limit the number of customer-support calls**Outcome if Customer A is "Fired":**- Profit will: - [x] Decrease by $40 in the long term**Note:** Enter negative numbers with a minus sign (e.g., -200).

1. Here the question has been asked about the concept of Activity Based costing where the fixed costs are allocated to the products/ services based on the relevant cost driver. It is in contrast to traditional costing where the fixed costs are alloacted based on volume ( ie.., no.of of units produced). 2. Cost drivers means the activities or services the drive the fixed cost. 3. An activity is a cost driver, such as purchase orders or machine setups. 4. The cost driver rate, which is the cost pool total divided by cost driver, is used to calculate the amount of overhead and indirect costs related to a particular activity. 5. In the given case, the cost drivers are a. No. of Transactions b. No. of Support calls Particulars Customer A Customer B Amount in $ Amount in $ Sales ($2000 x 0.4) 800 ($1000 x 0.4) 400 Less: Variable cost 0 0 Contribution margin 800 400 Less: Fixed costs Allocated Costs for Transactions (200 x 1) 200 (80 x 1) 80 Allocated cost for customer support (80 x 8) 640 (4 x 8) 32 Profit margin -40 2881. If a customer is unprofitable then, you can do any of the following fire the customer Increase the interest rates limit number of free customer calls 2. If you get rid of customer A, then profit will increase by $40 in long term.