Travel Agency specializes in flights between Toronto and Peru. It books passengers on Toronto Air. North’s fixed costs are $35,000 per month. Toronto Air charges passengers $1,700 per round-trip ticket. Calculate the number of tickets North Travel must sell each month to (a) break even and (b) make a target operating income of $17,000 per month in each of the following independent cases. Required: 1. North’s variable costs are $33 per ticket. Toronto Air pays Sunset 5% commission on ticket price. 2. North’s variable costs are $37 per ticket. Toronto Air pays Sunset 7% commission on ticket price. 3. North’s variable costs are $53 per ticket. Toronto Air pays $68 fixed commission per ticket to North. Comment on the results. 4. North’s variable costs are $40 per ticket. It receives $60 commission per ticket from Toronto Air. It charges its customers a delivery fee of $5 per ticket. Comment on the results.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Travel Agency specializes in flights between Toronto and Peru. It books passengers on Toronto Air. North’s fixed costs are $35,000 per month. Toronto Air charges passengers $1,700 per round-trip ticket.
Calculate the number of tickets North Travel must sell each month to (a) break even and (b) make a target operating income of $17,000 per month in each of the following independent cases.
Required:
1. North’s variable costs are $33 per ticket. Toronto Air pays Sunset 5% commission on ticket price.
2. North’s variable costs are $37 per ticket. Toronto Air pays Sunset 7% commission on ticket price.
3. North’s variable costs are $53 per ticket. Toronto Air pays $68 fixed commission per ticket to North. Comment on the results.
4. North’s variable costs are $40 per ticket. It receives $60 commission per ticket from Toronto
Air. It charges its customers a delivery fee of $5 per ticket. Comment on the results.
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