(CVP decision alternatives) John Thomas owns a small travel agency. His revenues are based on commissions earned as follows:

Monthly fixed costs include advertising ($1,100), rent ($900), utilities ($250), and other costs ($2,200). There are no variable costs.
During a normal month, John records the following items, which are subject to the above commission structure:

John is concerned because his monthly income is so small.

a. What is John’s normal monthly income? .

b. John can increase his airline bookings by 40 percent with an increase in advertising of $600. Should he increase advertising?

c. John’s friend Tim has asked him for a job in the travel agency. Tim has proposed that he be paid 40 percent of whatever additional commissions he can bring to the agency plus a salary of $300 per month. John has estimated Tim can generate the following additional bookings per month:

Hiring Tim would also increase other fixed costs by $300 per month. Should John accept Tim’s offer?
d.John hired Tim and in the first month Tim generated an additional $8,000 of bookings for the agency. The bookings, however, were all airline tickets. Was the decision to hire Tim a good one? Why or why not?LO1

Transcribed Image Text:

Airline bookings 10% commission Rental car bookings 15% commission Hotel bookings 20% commission