Scenario 1: Globe Travel Agency sells Spring Break trips to University of Housto
ID: 433116 • Letter: S
Question
Scenario 1: Globe Travel Agency sells Spring Break trips to University of Houston undergraduate
students. The fixed cost of Globe is $100,000 and its variable cost is $400 for every student who takes
the trip Globe offers. The price elasticity of demand is -2.5 at all levels of price. At present, the price of
the trip is $600/student and, at this price, demand is 1200 units. Assume that the number of trips sold
always equals demand.
Please refer to Scenario 1. Compute the breakeven quantity at current price, P=$600:
100 units
167 units
250 units
500 units
1000 units
100 units
167 units
250 units
500 units
1000 units
Explanation / Answer
Correct Answer:
D.500 units
Working note:
Breakeven point = fixed cost /(Price per unit – variable cost per unit)
Breakeven point = 100000/(600-400)
Breakeven point = 500 units
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