Sunshine Tours is a travel agency specializing in flights between Seattle and Ja

Question

Sunshine Tours is a travel agency specializing in flights between Seattle and Jamaica. It books passengers on Canadian Air. Canadian Air charges passengers S1,000 per round- trip ticket. Sunshine receives a commission of 8% of the ticket price paid per passenger, Sunshine's fixed costs are $22,000 per month. Its variable costs are $35 per ticket, including an $18 delivery fee by Emory Express. (Assume each ticket purchased is delivered in a separate package. Thus, the delivery fee applies to each ticket) REQUIRED (1) What is the number of tickets Sunshine must sell each month to Breakeven (rounded to the nearest dollar). Make a target profit of $9,992 (round to the nearest dollar) a. b. (2) Assume another company, TNT Express, offers to charge Sunshine only $12 per ticket delivered and Sunshine believes the fixed cost can be reduced by $104. How would accepting this offer affect your breakeven and what would that new breakeven be? (3) Returning to the original facts- assume Sunshine Tours decides to charge its customers a delivery fee of $5 per ticket. How would this change affect your break even point and units sold to reach a target profit of $9,992?

Explanation / Answer

1a. Break even no. of tickets = fixed costs/(revenue per ticket – variable cost per ticket)

Here fixed costs = $22,000. Revenue = 8% of $1,000 = $80 and variable cost per ticket = $35

Thus breakeven = 22,000/(80-35) = 488.89 tickets per month or rounded off to 489 tickets per month.

b. Tickets for target profit of 9,992 = (fixed costs+target profit)/ (revenue per ticket – variable cost per ticket) = 22,000+9,992/80-35

= 710.93 tickets or 711 tickets (rounded off)

2. In case of TNT new fixed costs = 22,000-104 = $21,896. New variable costs = 17+12 =$29. (Earlier the variable costs were 35 i.e. 17+$18 for delivery).

Thus new break even = 21896/(80-29) = 429.33 tickets (or 429 tickets rounded off) . Thus break even point will come down for Sunshine.

3. Here total revenue per ticket = commission+delivery fee = 80+5 = 85

Thus break even = 22,000/(85-35) = 440 tickets. From the original break even of 489 tickets the breakeven will fall to 440 tickets in this case.

No. of tickets for profit of $9,992 = 22000+9992/(85-35)

= 639.84 tickets or 640 tickets (rounded off). From the original 710.93 (711 rounded off) tickets required for profit of $9,992 the no. of tickets will fall to 639.84 (or 640 tickets rounded off).

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