Question

RAK Travel Agency specialises in tour packages between Dubai and Salalah. It books Passengers on EK Airlines at AED 900 per round-trip package. Until last month, EK Airlines paid RAK Travel a commission of 10% of the package price paid by each passenger. This commission was RAK Travel's only source of revenues. RAK Travels fixed costs are AED 14 000 per month (for salaries, rent, etc.) and its variable costs are AED 20 per package purchased for a passenger. This AED 20 includes an AED 15 per package delivery fee paid to Emirates Post. (To keep the analysis simple, please assume each round-trip package purchased is delivered separately. Thus the AED 15 delivery fee applies to each tour package.) Considering the recent economy, EK Airlines has just announced a revised payment schedule for all travel agents. It will now pay travel agents a 10% commission per package up to a maximum of AED 50. Any package costing more than AED 500 generates only a AED 50 commission, regardless of the package price. Instructions Answer the following questions : 1. Under the old 10% commission structure, how many round-trip packages must RAK Travel sell each month: (a) to break even and (b) to earn a profit of AED 7000? 2. How does EK's revised payment schedule affect your answers to (a) and (b) in requirement 1?

Answer 1

1.

Particulars	Amount
Commission (900 * 0.10) per ticket	90
Less : Variable cost	20
Contribution per ticket	70

Particulars	Break even	Earn profit of 7000
Fixed cost	14000	14000
Profit	0	7000
Total requirement A	14000	21000
Contribution per ticket	70	70
Total ticket required to be sold A / B	200	300

2.

Particulars	Amount
Commission (900 * 0.10) per ticket upto max of 50	50
Less : Variable cost	20
Contribution per ticket	30

Particulars	Break even	Earn profit of 7000
Fixed cost	14000	14000
Profit	0	7000
Total requirement A	14000	21000
Contribution per ticket	30	30
Total ticket required to be sold A / B	467	700