Question

1. RAK Travel Agency specialises in tour packages between Dubai and Salalah. It books

Passengers on EK Airlines at AED 900 per round-trip package. Until last month, EK Airlines paid RAK Travel a commission of 10% of the package price paid by each passenger. This commission was RAK Travel’s only source of revenues. RAK Travel’s fixed costs are AED 14 000 per month (for salaries, rent, etc.) and its variable costs are AED 20 per package purchased for a passenger. This AED 20 includes an AED 15 per package delivery fee paid to Emirates Post. (To keep the analysis simple, please assume each round-trip package purchased is delivered separately. Thus the AED 15 delivery fee applies to each tour package.)

Considering the recent economy, EK Airlines has just announced a revised payment schedule for all travel agents. It will now pay travel agents a 10% commission per package up to a maximum of AED 50. Any package costing more than AED 500 generates only a AED 50 commission, regardless of the package price.

Instructions

Answer the following questions (15 marks per question, Total 30 marks):

1. Under the old 10% commission structure, how many round-trip packages must RAK Travel sell each month:

(a) to break even and

(b) to earn a profit of AED 7000?

2. How does EK’s revised payment schedule affect your answers to (a) and (b) in requirement 1?

Answer 1

1. (a) Break even
Let assume no of trips for break even is "X"
Total Charge for X Trip = 900X
Commission from "X" Trip = 10% of 900X = 90X
Variable cost = 20X
Fixed cost = 14,000
90X= 14000+ 20X
70X = 14,000
X = (14,000/70) =	200	round trips packages
So, Break even point is 200 round trips packages
(b) to earn profit of AED 7000
Let assume no of trips to earn profit of AED 7000 is "X"
Commission Revenue - Variable cost - Fixed cost = Profit
90X - 20X - 14,000 = 7,000
70X = 21,000
X = (21,000/70)
X= 300 round trips packages
So, to earn profit of AED 7,000 = 300 round trips packages
2. EK's revised payment Schedule = 10% commission per package but upto AED 50/package only
Amount of Round trip package is = AED 900 Fixed
its 10 % is AED 90 but as per revised payment schedule commission would be AED 50 only
So, (a) break even
Let assume no of trips for break even is "X"
Commission from "X" Trip = 50X
Variable cost = 20X
Fixed cost = 14,000
50X= 14000+ 20X
30X = 14,000
X = (14,000/30) =	467	round trips packages
So, Break even point is 467 round trips packages
Hence, break even would increase by 167 (467-300) round trip package.
(b) to earn profit of AED 7000
Let assume no of trips to earn profit of AED 7000 is "X"
Commission Revenue - Variable cost - Fixed cost = Profit
50X - 20X - 14,000 = 7,000
30X = 21,000
X = (21,000/30)
X= 700 round trips packages
Hence, to earn AED 7000, RAK travel agency should sell 233 (700 - 467) round trip package