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Leadstar Travel Agency specializes in flights between Los Angeles and London. It books passengers on United Airlines at $900 per round-trip ticket. Until last month, United paid Leadstar a commission of 10% of the ticket price paid by each passenger. This commission was Leadstar only source of revenues. Leadstar fixed costs are $14,000 per month (for salaries, rent, and so on), and its variable costs are $20 per ticket purchased for a passenger. This $20 includes a $15 per ticket delivery fee paid to Federal Express. (To keep the analysis simple, we assume each round-trip ticket purchased is delivered in a separate package. Thus, the $15 delivery fee applies to each ticket.) United Airlines has just announced a revised payment schedule for all travel agents. It will now pay travel agents a 10% commission per ticket up to a maximum of $50. Any ticket costing more than $500 generates only a $50 commission, regardless of the ticket price.
1. Under the old 10% commission structure, how many round-trip tickets must Leadstar sell each month (a) to break even and (b) to earn an operating income of $7,000?
2. How does United's revised payment schedule affect your answers to (a) and (b) in requirement 1?
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