Mitch Weatherby owns a sports brokerage agency and sells tickets to major league baseball, football, and basketball games. He also sells sports travel packages that include game tickets, airline tickets, and hotel accommodations. Revenues are commissions based as follows:
Game ticket sales ......... 8% commission
Airline ticket sales ....... 10% commission
Hotel bookings sales ...... 20% commission
Monthly fixed costs include advertising ($ 2,200), rent ($ 1,800), utilities ($ 500), and other costs ($ 4,400). There are no variable costs. A typical month generates the following sales amounts that are subject to the stated commission structure:
Game tickets ...... $60,000
Airline tickets ..... 9,000
Hotel bookings ...... 14,000
Total .......... $83,000
a. What is Weatherby’s normal monthly profit or loss?
b. Weatherby estimates that airline bookings can be increased by 40 percent if he increases advertising by $ 1,200. Should he increase advertising?
c. Weatherby’s friend Rusty has asked him for a job in the travel agency. Rusty has proposed that he be paid 50 percent of any additional commissions he can bring to the agency plus a salary of $ 400 per month. Weatherby has estimated that Rusty can generate the following additional bookings per month:
Game tickets ...... $ 8,000
Airline tickets ..... 1,500
Hotel bookings ...... 6,000
Total .......... $15,500
Hiring Rusty would also increase fixed cost by $ 600 per month inclusive of salary. Should Weatherby hire Rusty?
d. Weatherby hired Rusty and in the first month, Rusty generated an additional $ 13,000 of bookings for the agency. The bookings, however, were all airline tickets. Was the decision to hire Rusty a good one? Why or why not?