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

Airline bookings 8% commission Rental car bookings 10% commission Hotel bookings 20% commission 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, Norman records the following items, which are subject to the above commission structure:

Airlines $30,000 Cars 4,500 Hotels 7,000 Total $41,500 Norman is concerned because he is experiencing a monthly loss.

a. What is Norman’s normal monthly income?

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

c. Norman’s friend Jeff has asked him for a job in the travel agency. Jeff has proposed that he be paid 50 percent of whatever additional commissions he can bring to the agency plus a salary of $300 per month. Norman has estimated Jeff can generate the following additional bookings per month:

Airlines $10,000 Cars 1,500 Hotels 4,000 Total $15,500 Hiring Jeff would also increase other fixed costs by $400 per month. Should Norman accept Jeff’s offer?

d. Norman hired Jeff and in the first month Jeff generated an additional $8,000 of bookings for the agency. The bookings, however, were all airline tickets.

Was the decision to hire Jeff a good one? Why or why not?