Problema Solution
A premiu credit card offered 5% back on all purchases for the first year as an incentive for new customers. The card annual fee is $87.50. Assuming the premium card's interest rate is generally competitive with cards offered with no annual fee, what is the breakeven level of purchases? Show and interpret a breakeven analysis.
Answer provided by our tutors
Let x be the amount of purchases made.
Amount recieved back as incentive = 5% of x = 0.05x
For breakeven point we have
0.05x = 87.5 => x = 87.5/0.05 => x = 1750
If the person spends more than $1750 each year he should go for the premium credit card otherwise he should choose the card with no annual fee.