Wembley Travel Agency Ticket Sales Analysis

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 old 10% commission structure, how many round-trip tickets must Wembley sell each month to earn an operating income of $7,000? Question 1Answer a. 300 tickets b. 250 tickets c. 400 tickets d. 450 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 old commission structure, we can follow these steps:

  1. Calculate the commission per ticket under the old structure:

    • Ticket price = $900
    • Commission = 10% of $900 = $90

  2. Calculate the total revenue from selling ( x ) tickets: [ \text{Total Revenue} = \text{Commission per ticket} \times x = 90x ]

  3. Calculate the total variable costs for ( x ) tickets:

    • Variable cost per ticket = $20 [ \text{Total Variable Costs} = 20x ]

  4. Calculate the total costs (fixed + variable) for ( x ) tickets:

    • Fixed costs = $14,000 [ \text{Total Costs} = \text{Fixed Costs} + \text{Total Variable Costs} = 14,000 + 20x ]

  5. Set up the equation for operating income:

    • Operating Income = Total Revenue - Total Costs
    • We want the operating income to be $7,000: [ 7,000 = 90x - (14,000 + 20x) ]

  6. Simplify the equation: [ 7,000 = 90x - 14,000 - 20x ] [ 7,000 = 70x - 14,000 ] [ 70x = 7,000 + 14,000 ] [ 70x = 21,000 ] [ x = \frac{21,000}{70} = 300 ]

Thus, Wembley must sell 300 tickets each month to earn an operating income of $7,000.

The correct answer is: a. 300 tickets