Question

Dana Travel Agency specialises in flights between Los Angeles and London. It books passengers on Virgin Airlines at £900 per round-trip ticket.

Until last month, Virgin paid Dana a commission of 10% of the ticket price paid by each passenger. This commission was Dana’s only source of income. The agency expects to sell 500 tickets each month.

Dana’s fixed costs are £14,000 per month (for salaries, rent, and so on), and its variable costs are £20 per ticket purchased for a passenger. This £20 includes a £15 per ticket delivery fee paid to Federal Express. (To keep the analysis simple, we assume each round-trip ticket purchased is delivered in a separate package. Thus, the £15 delivery fee applies to each ticket).”

Required:

1. “Under the 10% commission structure, how many round-trip tickets must Dana sell each month: “

1. to break even     
2. to earn an operating income of £7,000?          

2. “Under the 10% commission structure, what is the margin of safety?”

3. “Virgin 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.”

How does Virgin’s revised payment schedule affect your answers in question a and b?

Please comment on the impact

d. “Dana claims “That there is no such thing as a fixed cost. All costs can be ‘unfixed’ given sufficient time.” Do you agree? What is the implication of your answer for breakeven analysis?

Answer 1

note for 5th part

BEP = commission per ticket = variable cost per ticket

comment for doubts

please upvote

thanks