(CVP decision alternatives) Norman Horn owns a small travel agency. His revenues are based on commissions earned as follows:
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Airline bookings
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8% commission
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Rental car bookings
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10% commission
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Hotel bookings
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20% commission
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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:
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Airlines
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$30,000
|
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Cars
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4,500
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Hotels
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7,000
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Total
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$41,500
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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:
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Airlines
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$10,000
|
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Cars
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1,500
|
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Hotels
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4,000
|
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Total
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$15,500
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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?