Problem:
(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. ShouldNorman 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?