Question

Recently, the owner of a Trader Joe’s franchise decided to change how she compensated her top manager. Last year, she paid him a fixed salary of $60,000 and her store made $135,000 in profits (not counting payment to her top manager). She suspected the store could do much better and feared the fixed salary was causing her top manager to shirk on the job. Therefore, this year she decided to offer him a fixed salary of $30,000 plus 18% of the store’s profits. Since the change, the store is performing much better, and she forecasts profits this year to be $275,000 (again, not counting the payment to her top manager).

Assuming the change in compensation is the reason for the increased profits, and that the forecast is accurate, how much more money will the owner make (net of payment to her top manager) because of this change?

$

Does the manager make more money under the new payment scheme?

(Click to select)  Yes  No

Answer 1

CASE 1

Manager is paid fixed salary only.

Salary to manager = $60,000

Profit of store = $135,000

Calculate the money made by owner -

Money made by owner = Profit of store - Salary to manager

Money made by owner = $135,000 - $60,000 = $75,000

The owner will make $75,000.

CASE 2

Manager is paid fixed salary and a part of profit.

Salary to manager = $30,000

Profit of store = $275,000

Manager is paid 18% of the profit.

Share of profit paid to manager = 0.18 * $275,000 = $49,500

Total amount paid to manager = Salary to manager + Share of profit paid to manager = $30,000 + $49,500 = $79,500

Calculate the money made by owner -

Money made by owner = Total profit - Total amount paid to manager

Money made by owner = $275,000 - $79,500 = $195,500

The money made by owner is $195,500.

Calculate the increase in money made by owner -

Increase = Money made under new payment scheme - Money made under old payment scheme = $195,500 - $75,000 = $120,500

Thus,

The more money that owner will make due to this change is $120,500

Yes, the manager make more money under the new payment scheme.