Question

Question-4

Travel Agency specializes in flights between Toronto and Peru. It books passengers on Toronto Air. North’s fixed costs are $35,000 per month. Toronto Air charges passengers $1,700 per round-trip ticket.

Calculate the number of tickets North Travel must sell each month to (a) break even and (b) make a target operating income of $17,000 per month in each of the following independent cases.

Required:

1. North’s variable costs are $33 per ticket. Toronto Air pays Sunset 5% commission on ticket price.

2. North’s variable costs are $37 per ticket. Toronto Air pays Sunset 7% commission on ticket price.

3. North’s variable costs are $53 per ticket. Toronto Air pays $68 fixed commission per ticket to North. Comment on the results.

4. North’s variable costs are $40 per ticket. It receives $60 commission per ticket from Toronto

Air. It charges its customers a delivery fee of $5 per ticket. Comment on the results.

Answer 1

1a. Break even= fixed cost / contribution margin

contribution margin = sales price- variable cost

($1,700*5%) - $33

=$52

break evene = $35,000/$52

=673 tickets

1b. Fixed cost+target income / Contribution margin

=$35,000+$17,000) /$52

=1000 tickets

2a.

Break even= fixed cost / contribution margin

contribution margin = sales price- variable cost

($1,700*7%) - $37

=$82

break evene = $35,000/$82

=427 tickets

2b. Fixed cost+target income / Contribution margin

=$35,000+$17,000) /$82

=634 tickets

3a.

Break even= fixed cost / contribution margin

contribution margin = sales price- variable cost

$68-$53

=$15

break even = $35,000/$15

=2,333 tickets

3b. Fixed cost+target income / Contribution margin

=$35,000+$17,000) /$15

=3,467 tickets

Comment: As the commission reduces the break even point increases. The number of tickets to be sold to acquire target profit aslo increases with decrease in commission.

4a.

seliing price= comission+delivery fee

=$60+5

=$65

Break even= fixed cost / contribution margin

contribution margin = sales price- variable cost

65-40

=$25

break even = $35,000/$25

=1,400 tickets

4b. Fixed cost+target income / Contribution margin

=$35,000+$17,000) /$25

=2,080 tickets

Comment: Delivery fee is an additional income. However due to increase in variable cost to $40, break even point has increased as compared to (1) & (2) above.

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