Question

Sunset Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on Hamilton Air. Sunset’s fixed costs are $23,500 per month. Hamilton Air charges passengers $1,500 per round-trip ticket. Calculate the number of tickets Sunset must sell each month to (a) break even and (b) make a target operating income of $10,000 per month in each of the following independent cases. 1. Sunset’s variable costs are $43 per ticket. Hamilton Air pays Sunset 6% commission on ticket price. 2. Sunset’s variable costs are $40 per ticket. Hamilton Air pays Sunset 6% commission on ticket price. 3. Sunset’s variable costs are $40 per ticket. Hamilton Air pays $60 fixed commission per ticket to Sunset. Comment on the results. 4. Sunset’s variable costs are $40 per ticket. It receives $60 commission per ticket from Hamilton Air. It charges its customers a delivery fee of $5 per ticket. Comment on the results

Answer 1

Answer:

See the explanation below.

Explanation:

1 a. Calculate the number of tickets Sunset must sell each month to break even.

Selling price = 6% * $1,500 = $90 per ticket

Variable  cost per unit = $43 per ticket

Contribution margin per unit = $90 – $43 = $47 per ticket

Fixed cost = $23,500

Break-even tickets per month = Fixed cost / Contribution margin per unit = $23,500 / $47 =  500 tickets

1 b. Calculate the number of tickets Sunset must sell each month to make a target operating income of $10,000 per month.

Number of tickets = (Fixed cost + Targeted profit) / Contribution margin per unit = ($23,500 + $10,000) / $47 = 712.77, or 713 tickets

2 a. Calculate the number of tickets Sunset must sell each month to break even.

Selling price = 6% * $1,500 = $90 per ticket

Variable  cost per unit = $40 per ticket

Contribution margin per unit = $90 – $40 = $50 per ticket

Fixed cost = $23,500

Break-even tickets per month = Fixed cost / Contribution margin per unit = $23,500 / $50 =  470 tickets

2 b. Calculate the number of tickets Sunset must sell each month to make a target operating income of $10,000 per month.

Number of tickets = (Fixed cost + Targeted profit) / Contribution margin per unit = ($23,500 + $10,000) / $50 = 670 tickets

3 a. Calculate the number of tickets Sunset must sell each month to break even.

Selling price = $60 per ticket

Variable  cost per unit = $40 per ticket

Contribution margin per unit = $60 – $40 = $20 per ticket

Fixed cost = $23,500

Break-even tickets per month = Fixed cost / Contribution margin per unit = $23,500 / $20 =  1,175 tickets

3 b. Calculate the number of tickets Sunset must sell each month to make a target operating income of $10,000 per month.

Number of tickets = (Fixed cost + Targeted profit) / Contribution margin per unit = ($23,500 + $10,000) / $20 = 1,675 tickets

Comment:

Due a fall in commission, there are appreciable increases in the break-even point and the number tickets that have to be sold to meet a targeted operating income of $10,000.

4 a. Calculate the number of tickets Sunset must sell each month to break even.

Selling price = $60 + $5 = $65 per ticket

Variable  cost per unit = $40 per ticket

Contribution margin per unit = $65 – $40 = $25 per ticket

Fixed cost = $23,500

Break-even tickets per month = Fixed cost / Contribution margin per unit = $23,500 / $25 =  940 tickets

4 b. Calculate the number of tickets Sunset must sell each month to make a target operating income of $10,000 per month.

Number of tickets = (Fixed cost + Targeted profit) / Contribution margin per unit = ($23,500 + $10,000) / $25 = 1,340 tickets

Comment:

The $5 delivery fee brings about an increased contribution margin higher than before, which makes both the break-even point and the tickets sold to achieve operating income of $10,000 to fall.