Wembley Travel Agency's Ticket Sales Requirement

Answered using GPT-4o mini by AI Answer Generator

Question:

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 earn an operating income of $7,000? Question 3Answer a. 350 tickets b. 450 tickets c. 550 tickets d. 700 tickets

Answer:

To determine how many round-trip tickets Wembley Travel Agency must sell each month to earn an operating income of $7,000 under the new commission structure, we need to analyze the revenue and costs involved.

  1. Ticket Price: $900
  2. Commission per Ticket: Under the new structure, the commission is capped at $50 for tickets over $500. Therefore, for each ticket sold, Wembley earns $50 in commission.
  3. Variable Cost per Ticket: $20 (which includes the $15 delivery fee).
  4. Fixed Costs: $14,000 per month.
  5. Desired Operating Income: $7,000.

Step 1: Calculate Contribution Margin per Ticket

The contribution margin per ticket is calculated as follows:

[ \text{Contribution Margin} = \text{Commission} - \text{Variable Cost} ]

Substituting the values:

[ \text{Contribution Margin} = 50 - 20 = 30 ]

Step 2: Calculate Total Required Contribution Margin

To find out how much total contribution margin is needed to cover both fixed costs and desired operating income, we add the fixed costs and the desired operating income:

[ \text{Total Required Contribution Margin} = \text{Fixed Costs} + \text{Desired Operating Income} ]

Substituting the values:

[ \text{Total Required Contribution Margin} = 14,000 + 7,000 = 21,000 ]

Step 3: Calculate the Number of Tickets to Sell

Now, we can find the number of tickets that need to be sold to achieve the total required contribution margin:

[ \text{Number of Tickets} = \frac{\text{Total Required Contribution Margin}}{\text{Contribution Margin per Ticket}} ]

Substituting the values:

[ \text{Number of Tickets} = \frac{21,000}{30} = 700 ]

Conclusion

Wembley Travel Agency must sell 700 tickets each month to earn an operating income of $7,000.

The correct answer is d. 700 tickets.