You are trying to attract new customers that you feel could become repeat customers. The average price of the items you sell is $93 with a $70 variable cost. Your monthly interest rate is 2.1 percent.
Your experience tells you that 10 percent of these customers will never pay their bill. What is the
Value of a new customer who does not default on their bill?

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin, which is the amount remaining from the selling price after subtracting the variable cost:

Contribution Margin = Selling Price - Variable Cost 
Contribution Margin = $93 - $70 
Contribution Margin = $23

Next, we need to calculate the expected value of a new customer who does not default on their bill:

Expected Value = Contribution Margin * (1 - Default Rate) * 1/Interest Rate 
Expected Value = $23 * (1 - 0.1) * 1/0.021 
Expected Value = $23 * 0.9 * 47.62 
Expected Value = $986.46

So the value of a new customer who does not default on their bill is approximately $986. The closest answer choice is B) $1,095, which is within a reasonable margin of error.

You Are Trying to Attract New Customers That You Feel