Cost management strategies for business decisions

Beaujolais Financial Group (BFG) segments its customers into premium members, who purchase extensive services, and standard members, who purchase minimal services. It offers premium members a 10 percent discount on the total package of services purchased but requires standard members to pay full price.

BFG devotes one full-time customer representative per 100 premium members and one per 1,000 standard members. Customer representatives receive salaries and a bonus of 1 percent of customer revenue (after 10 percent discount, if applicable). BFG estimates that it spends twice as much on total promotions for premium members to encourage their loyalty.

General and administrative cost, which is not traced to customers,
is $2,400,000 per year.

Customer Service Resources Total Premium Standard
Number of customers.................................................................. 125,000 45,000 80,000
Average sales salary/year ...................................................... $35,000 $35,000
Promotion costs .......................................................................... $2,000,000
Average revenue per customer (before discount) ........................................ $440 $50

Required
a. Estimate BFG's customer and overall profitability.
b. Write a short memo that critiques BFG's customer service policies and measurements.
c. Build your own spreadsheet. Develop a spreadsheet to answer requirement (a).