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Hard Profitability Break-even Analysis

Credit Cards

#Financial Services #Banking
ProHub Comment

This is a classic break-even analysis case requiring candidates to calculate a weighted average contribution margin across customer segments, then divide fixed marketing costs by the contribution margin. The case tests ability to identify relevant data from exhibits, structure a clear calculation framework, and contextualize the result within the bank's existing customer base.

Estimated Time 15 minutes
Difficulty Hard
Source PeterK
50 / 100
Birch Bank, a major regional U.S. bank, provides a diverse range of financial products (e.g. loans, bank accounts). The bank would like to launch a new credit card and spend $12M per year on its marketing. How many new card members should they attract to break even?

Clarifying Information

  1. Exhibit 1. Birch Bank’s Segments of Credit Card Holders and Their Economics, 2023
  2. One customer can issue only one new credit card
  3. Average variable costs per account is expected to be $160 per year (e.g. defaults, cost of funds)
  4. Marketing expenses are the major fixed costs. Other fixed costs (e.g. R&D) are negligible
  5. It’s fair to assume that the new credit card will have the same distribution of customer segments (e.g. heavy/light revolvers) as Birch Bank has right now (see Exhibit 1)