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. This commission was Wembley’s only source of revenue. Wembley’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.)
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. Under the new revised payment schedule system, how many round-trip tickets must Wembley sell each month to break even ? Question 2Answer a. 250 tickets b. 350 tickets c. 467 tickets d. 650 tickets
To determine how many round-trip tickets Wembley Travel Agency must sell each month to break even under the new commission structure, we need to calculate the total costs and the revenue per ticket.
Under the new commission structure, the commission for each ticket is capped at $50 since the ticket price is $900 (which is greater than $500). Therefore, the revenue per ticket for Wembley is:
The variable costs per ticket are given as $20. This includes the $15 delivery fee and other variable costs.
The contribution margin per ticket is calculated as follows:
[ \text{Contribution Margin} = \text{Revenue per Ticket} - \text{Variable Costs per Ticket} ]
Substituting the values:
[ \text{Contribution Margin} = 50 - 20 = 30 ]
Wembley's fixed costs are given as $14,000 per month.
To find the break-even point in terms of the number of tickets, we use the formula:
[ \text{Break-Even Point (in tickets)} = \frac{\text{Fixed Costs}}{\text{Contribution Margin per Ticket}} ]
Substituting the values:
[ \text{Break-Even Point} = \frac{14,000}{30} \approx 466.67 ]
Since Wembley cannot sell a fraction of a ticket, we round up to the nearest whole number:
[ \text{Break-Even Point} = 467 \text{ tickets} ]
The number of round-trip tickets Wembley must sell each month to break even is 467 tickets.
Thus, the correct answer is: c. 467 tickets.