Reference no: EM132431338

Habesha Travel Agency specializes in flights between Addis Ababa and Bahirdar. It books passengers on Ethiopian Airlines at 900 per round-trip ticket. Until last month, United paid Habesha a commission of 10% of the ticket price paid by each passenger. This commission was Habesha's only source of revenues. Habesha's fixed costs are Br.14,000 per month (for salaries, rent, and so on), and its variable costs are Br.20 per ticket purchased for a passenger. This Br.20 includes a Br.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 Br.15 delivery fee applies to each ticket.)

Ethiopian 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 Br.50. Any ticket costing more than Br.500 generates only a Br.50 commission, regardless of the ticket price.

Required

a. Under the old 10% commission structure, how many round-trip tickets must Habesha sell each month (a) to break even and (b) to earn an operating income of Br.7, 000?

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