Question

Wembley Travel Agency specializes in flights between Los Angeles and London.

It books passengers on United Airlines at $900 per round-trip ticket.

Until last month, United paid Wembley a commission of 10% of the ticket price paid by each passenger.

The commission was Wembley's only source of revenues.

Wembley's fixed costs are $14,000 per month (for salaries, rent and so on) and its variable costs, such as commissions and bonuses are $20/ticket purchased for a passenger.

United Airlines has just announced a revised payment schedule for all travel agents.

It will now pay travel agents a 10% commission per ticket up to a maximum of $50.

Any ticket costing more than $500 generates only a $50 commission, regardless of the ticket price.

Wembley's managers are concerned about how United's new payment schedule will affect its break-even point and profitability.

Requirement 1: Under the old 10% commission structure, how many round-trip tickets must Wembley sell each month a) to break even and b) to earn an operating income of $7,000?

Requirement 2: How does United's revised payment schedule affect your answer to a) and b) in requirement 1?

Answer 1

	Selling Price (900*10%)	$        90
	Variable Cost	$        20
	Contribution	$        70
	Fixed Cost	$ 14,000
1.a	Breakeven number of tickets (14000/70)	200 Tickets
1.b	Quantity of ticket to be sold for Target profit ((14000+7000)/70)	300 Tickets
	Selling Price	$        50
	Variable Cost	$        20
	Contribution	$        30
	Fixed Cost	$ 14,000
2.a	Breakeven number of tickets (14000/30)	467 Tickets
2.b	Quantity of ticket to be sold for Target profit ((14000+7000)/30)	700 Tickets