Assignment 1 CVP Comprehensive Problem Gupta Travel is a charterairline service for corporate clients traveling between Atlanta andBoston. The company leases one jet aircraft and flies an average of160 one-way trips per year. Gupta’s marketing strategy is to sell amore enjoyable travel experience than its rivals in the commercialairline industry. Gupta arranges ground transportation in Atlantaand Boston for its clients, offers a more spacious cabin withlarger seats and more legroom, and serves gourmet meals on itsflights. Gupta does not sell its services to individuals; ratherits services are marketed directly to corporate clients. Therefore,when Gupta books a flight for a client, it is not merely selling afew seats on its aircraft. Rather, the corporate client is bookingthe use of the aircraft for its travel needs. Gupta uses a networkof commissioned travel agents to sell its services. These agentsare not employees of Gupta, and the agents receive a 20 percentcommission (no fixed salary) on each flight sold on Gupta Travel.Gupta had the following income statement for the year endingDecember 31, 2018. Gupta Travel Income Statement For the YearEnding 12/31/2018 Sales Revenue (160 one-way flights _ $50,000 perflight) $8,000,000 Commissions Expense (20 percent of SalesRevenue) $1,600,000 Annual Lease Expense—Airplane $1,200,000 AnnualFee for Airport Ground Crew Services $900,000 Flight Crew Expense(160 one-way flights _ $1,600 per flight) $256,000 Fuel Expense(160 one-way flights _ $1,100 per flight) $176,000 Food Expense(160 one-way flights _ $900 per flight) $144,000 GroundTransportation Expense (160 one-way flights _ $250 per flight)$40,000 Other Fixed General and Administrative Expenses $180,000Fixed Interest Expense $250,000 Net Income $ 3,254,000 (ignoretax)

(1) Prepare the contribution margin Income Statement (2) What isGupta’s current breakeven point? (3) At the end of 2015, Gupta’smanagement learned that its commissioned travel agents aredemanding an increase in their commission rate to 30 percent perflight for the upcoming year. As a result, Gupta’s president hasdecided to investigate the possibility of hiring an in-house salesstaff to replace the commissioned travel agents. Gupta’s accountingdepartment compiled the following information to be used toevaluate the cost of establishing an in-house sales department.Costs of Establishing an In-House Sales Department The accountingdepartment estimates that Gupta would need to hire four salespeopleat an average payroll cost of $85,000 per employee to cover theworkload of the current travel agents. Also, in order to hirehighly qualified individuals for these positions, the compensationpackage must include commissions. To be competitive with theindustry-standard commission rate, Gupta must offer a 15 percentcommission on each flight sold in addition to the salary. The costof the in house sales department will also include travel costs andsupport staff. Travel and entertainment expense is expected tototal $600,000 (fixed) for the year, and the annual cost of supportstaff positions will be fixed at $150,000. Gupta currently relieson the travel agents to sell its services. If Gupta were to replaceits commissioned travel agents with an in-house sales department,then it would have to bear more of the cost of advertising itsservices. In order to maintain the company’s image and manage thetransition from established travel agents to an inhouse salesstaff, the accounting department recommends spending $550,000(fixed) annually on advertising. (3) Use the December 31, 2018Income Statement (with 160 flights sold) to estimate Gupta’sbreakeven point in units (flights) if the company hires its ownsales force and increases its advertising costs. Based on youranswer, what amount of sales revenue would the company generate atthis breakeven point? (4) Assume that Gupta decides not to hire itsown sales force, but instead consents to give its currentcommissioned travel agents the raise they are demanding. How manyflights must the company sell (with the new commission rate) togenerate the same net income that was reported in 2018? (5)Management must choose between: (a) hiring its own sales force and(b) compensating its current network of travel agents with a highercommission rate. (i ) What is the profit formula for alternative(a), hiring an in-house sales force? (ii ) What is the profitformula for alternative (b), increasing the commission rate of thecurrent travel agents? (iii ) At what level of sales volume (inflights) would management be indifferent between these twoalternatives? (Indifference means the sales volume [units] thatwould produce the same profit between the alternatives.)