1. RAK Travel Agency specialises in tour packages between Dubai and Salalah. It books

Passengers on EK Airlines at AED 900 per round-trip package. Until last month, EK Airlines paid RAK Travel a commission of 10% of the package price paid by each passenger. This commission was RAK Travels only source of revenues. RAK Travels fixed costs are AED 14 000 per month (for salaries, rent, etc.) and its variable costs are AED 20 per package purchased for a passenger. This AED 20 includes an AED 15 per package delivery fee paid to Emirates Post. (To keep the analysis simple, please assume each round-trip package purchased is delivered separately. Thus the AED 15 delivery fee applies to each tour package.)

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

Instructions

Answer the following questions (15 marks per question, Total 30 marks):

1. Under the old 10% commission structure, how many round-trip packages must RAK Travel sell each month:

(a) to break even and

(b) to earn a profit of AED 7000?

2. How does EKs revised payment schedule affect your answers to (a) and (b) in requirement 1?