Question

Sunshine Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on Hamilton Air. Sunshine's fixed costs are $28,500 per month. Hamilton Air charges passengers $1,100 per round-trip ticket. Read the requirement. Begin by selecting the formula to calculate the breakeven points. Breakeven number of units = Next, select the formula to calculate the number of tickets needed to meet the target operating income. Quantity of units required to be sold = ( C + D Now complete the requirement for each of the cases. Begin with case 1. Case 1: Sunshine's variable costs are $36 per ticket. Hamilton Air pays Sunshine 6% commission on ticket price. Sunshine must sell tickets to break even and tickets to meet the target operating income. Case 2: Sunshine's variable costs are $28 per ticket. Hamilton Air pays Sunshine 6% commission on ticket price. Sunshine must sell tickets to break even and tickets to meet the target operating income.

Answer 1

Solution:

Break number of units = Fixed Cost / Contribution margin per Unit

Quantity of units required to be sold = ( Fixed Cost + Target Operating Income )/Contribution Margin per Unit

1.

Selling price per unit	$66 per ticket(6% × 1,100)
Variable cost per unit	$36
Contribution margin per unit	$30($66 - $36)
Fixed cost per month	$28,500

1.a.)Break even =$28,500/$30

= 950 tickets

1b.) Quantity of units required to be sold = ($28,500 + $11,000)/ $30

$39,500/ $30 =1316.66

1316 tickets

Sunshine must sell 950 tickets to break even and 1316 tickets to meet the target operating income.

2.)

Selling price per unit	$66(6% × $1,100)
Variable cost per unit	$28
Contribution margin per unit	$38($66 - $28)
Fixed cost per month	$28,500

a.) Break even tickets = $28,500/$38

= 750 tickets

b.) Quantity of units required to be sold = ($28,500 + 11,000) /$38

$39,500/$38 =1039.47

1,039 tickets

Sunshine must sell 750 tickets to break even and 1039 tickets to meet the target operating income.

3.)

Selling price per unit	$47
Variable cost per unit	$28
Contribution margin	$19($47 - $28)
Fixed cost per month	$28,500

a.) Break even tickets = $28500/$19

= 1500 tickets

b.)Quantity of units required to be sold =($28,500 + $11,000) / $19

=$39,500/$19 = 2078.95

2,078 tickets

Sunshine must sell 1,500 tickets to break even and 2,078 tickets to meet the target operating income.

When company Case 3 to Case 2 , the​​​​ reduced commission sizably increases the break even point and the number of tickets required to yield a target operating income of $11,000.

4.)

Selling price per unit	$53($47 + $6)
Variable cost per unit	$28
Contribution margin per unit	$25($53 - $28)
Fixed cost per month	$28,500

a.) Break even tickets = $28,500/$25

= 1,140 tickets

b.) Quantity of units required to be sold = ($28,500 + 11,000) /$25

=$39,500/ $25 = 1,580

1,580 tickets

Sunshine must sell 1,140 tickets to break even and 1,580 tickets to meet the target operating income.

When comparing Case 4 to Case 3, the $6 delivery fee results in a higher contribution margin, which reduces both the break even point and the number of tickets sold to attain operating income of $11,000.