Question: Cost Function for Travel Services One Travel provides travel services on the Internet. 2011 was an important year for One Travel as it reported positive operating income after 3 years of operating losses. In the first quarter of 2010, One Travel reported an operating loss of $11 million on sales revenue of $74 million. In the first quarter of 2011, sales revenue had more than doubled to $154 million, and One Travel had operating income of $61 million. Assume that fixed costs were the same in 2011 as in 2010.
1. Compute the operating expenses for One Travel in the first quarter of 2010 and in the first quarter of 2011.
2. Determine the cost function for One Travel, that is, the total fixed cost and the variable cost as a percentage of sales revenue. Use the same form as equation (1) on page 91 .
3. Explain how One Travel's operating income could increase by $72 million with an increase in sales of $80 million, while it had an operating loss of $11 million on its $74 million of sales in the first quarter of 2010.