Question

In: Accounting

(1)Joe is a contractor who operates a train station for the City of Austin. The City...

(1)Joe is a contractor who operates a train station for the City of Austin. The City of Austin pays Joe a commission of 20 % based on total ticket sales revenue. The City of Austin charges the customer $1,800 per ticket. The commission is the only revenue source that Joe received from the City of Austin. Joe's fixed costs are $14,000 per month and his variable costs are $20 per train ticket.

Analysis 1:

(a) How many train tickets must Joe sell to break-even?

(b) If Joe wants to make a profit of $ 7,000, how many tickets must Joe sell?

Analysis 2:

(2) The City of Austin has decided that it will now pay Joe a 20% commission per train ticket up to a maximum of $50 regardless of the price of the ticket. Any train ticket costing more than $1000 will generate only a $50 commission. Joe is wondering how this new arrangement Will affects his breakeven point and his profit.

(a) How will analysis 2 affect your answers in analysis 1 above?

Expert Solution

Answer to Question 1.
Part a.
Sales Commission per Ticket = $1,800 * 20%
Sales Commission per Ticket = $360

Total Variable Cost per ticket = $20 + $360
Total Variable Cost per ticket = $380

Unit Contribution Margin = Unit Selling price – Unit Variable Cost
Contribution Margin per Ticket = $1,800 - $380
Contribution Margin per Ticket = $1,420

Break Even Point (Units) = Fixed Cost / Unit Contribution Margin
Break Even Point (Tickets) = $14,000 / $1,420
Break Even Point (Tickets) = 9.86 or 10 tickets

Part b.
Desired Number of Units = (Fixed Cost + Target Profit) / Unit Contribution Margin
Desired Number of Units (Tickets) = ($14,000 + $7,000) / $1,420
Desired Number of Units (Tickets) = $21,000 / $1,420
Desired Number of Units (Tickets) = 14.79 or 15 Tickets

Answer to Question 2.
Part a.
Sales Commission per Ticket = $1,800 * 20% or $50 whichever is maximum
Sales Commission per Ticket = $50

Total Variable Cost per ticket = $20 + $50
Total Variable Cost per ticket = $70

Unit Contribution Margin = Unit Selling price – Unit Variable Cost
Contribution Margin per Ticket = $1,800 - $70
Contribution Margin per Ticket = $1,730

Break Even Point (Units) = Fixed Cost / Unit Contribution Margin
Break Even Point (Tickets) = $14,000 / $1,730
Break Even Point (Tickets) = 8.09 or 8 tickets

This arrangement will help in achieving Break Even Point at earlier level and will result into higher profit as compared to the previous arrangement.

ekkarill92 answered 2 years ago

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