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. Should Norman accept Jeff’s offer?
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