Dana Travel Agency specialises

Dana Travel Agency specialises in flights between Los Angelesand London. It books passengers on Virgin Airlines at £900 perround-trip ticket.

Until last month, Virgin paid Dana a commission of 10% of theticket price paid by each passenger. This commission was Dana’sonly source of income. The agency expects to sell 500 tickets eachmonth.

Dana’s fixed costs are £14,000 per month (for salaries, rent,and so on), and its variable costs are £20 per ticket purchased fora passenger. This £20 includes a £15 per ticket delivery fee paidto Federal Express. (To keep the analysis simple, we assume eachround-trip ticket purchased is delivered in a separate package.Thus, the £15 delivery fee applies to each ticket).”

Required:

1. “Under the 10% commission structure, how many round-triptickets must Dana sell each month: “

1. to break even     
2. to earn an operating income of£7,000?          

2. “Under the 10% commission structure, what is the margin ofsafety?”

3. “Virgin Airlines has just announced a revised payment schedulefor all travel agents. It will now pay travel agents a 10%commission per ticket up to a maximum of £50. Any ticket costingmore than £500 generates only a £50 commission, regardless of theticket price.”

How does Virgin’s revised paymentschedule affect your answers in question a and b?

Please comment on the impact

d. “Dana claims “That there is no such thing as a fixed cost.All costs can be ‘unfixed’ given sufficient time.” Do you agree?What is the implication of your answer for breakeven analysis?