Dana Travel Agency specialises in flights between Los Angeles and London. It books passengers on Virgin Airlines at 900 per round-trip ticket.

Until last month, Virgin paid Dana a commission of 10% of the ticket price paid by each passenger. This commission was Danas only source of income. The agency expects to sell 500 tickets each month.

Danas fixed costs are 14,000 per month (for salaries, rent, and so on), and its variable costs are 20 per ticket purchased for a passenger. This 20 includes a 15 per ticket delivery fee paid to Federal Express. (To keep the analysis simple, we assume each round-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-trip tickets 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 of safety?

3. Virgin Airlines has just announced a revised payment schedule for all travel agents. It will now pay travel agents a 10% commission per ticket up to a maximum of 50. Any ticket costing more than 500 generates only a 50 commission, regardless of the ticket price.

How does Virgins revised payment schedule 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?