Question

The local grocery store expects that customers will use credit cards to pay for a total of 30 comma 000 sales transactions during the month of April. These transactions are expected to amount to $ 9 comma 000 comma 000 in total sales revenue. The credit card issuers charge the store a transaction fee equal to $ 0.20 per transaction plus 1.5​% of the amount charged. When budgeting for operating expenses in​ April, how much should the store expect to incur for credit card transaction​ fees?

Answer 1

Answer:

Budgeted operating expense for Credit Card transactions:

Credit Card Transaction fee $0.20 x 30,000 + 1.5% of $9,000,000 = $141,000

Explanation:

The first element of the budgeted expense is $0.20 of 30,000 transactions.  This gives a value of $6,000.

The second element is 1.5% of the transaction value.  This gives a value of $135,000.

When added up, we have a total of $141,000 as the total expense to be budgeted for credit card transactions.

The essence of having such separate charges is to capture the volume of transactions as well as the value.  Transaction-based services are usually priced to include costs based on volume and value.

It is generally considered to be fair for the two parties involved.  Sometimes, the volume may be less but the value more and vice versa.  In order to compensate the service provider fairly, such arrangements are made to integrate volume and value in the pricing scheme.