Question

It is 2020. The US government has passed a new federal minimum wage of $11.00/ hour. It will go into effect on January 1, 2021. Please follow the instructions, given the background information in items A, B, C, and D below.

Instructions

1. Calculate the immediate financial impact in 2021 (change in hourly wages) on the profitability of the company due to the impending increase in the minimum wage. Ignore tax issues such as employment tax in your calculation.

2. Identify at least three (3) courses of action (options) for the owner of this company that will offset the increase in labor costs from #1 above. Explain why you think these options are viable options for the small company. Your course of action must quickly offset the effect of the increase in wages and the decrease in profitability of the company due to the minimum wage increase.

3. Lastly, recommend the one course of action from among your list of three courses of action that you think is the best option for the small business owner and his or her company. Justify your response.

Background Information

A- The company has 19 employees, which includes two assistant managers. The owner is the only shareholder of the company.

B. 6 employees earn $8.00/ hour which is slightly above the current federal minimum wage, but $3/ per hour below the new federal minimum wage.

C. The other employees earn the following:

ii. 6 earn $13/ hour

iii. 3 earn $18/ hour

iv. 2 earn $22/ hour

v. The 2 managers each earn $50,000 per year

See Table 1 on the next page.

D. The company earned a profit last year of $100,000 based on sales of $1,500,000 that was passed through to the owner as the owner’s only source of income.   This year sales are on track to be approximately $1,500,000 again due to industry conditions. The owner’s family just bought a new house for their growing family and has a mortgage of $141,000 with monthly payments of $1,008 per month.

E. The owner’s spouse does not work and the family cannot justify the spouse getting a job of any kind because the wages from a new job would not cover the weekly cost of day care and after school care for the family’s three young children, ages 2, 5, and 7.

Table 1. Summary of Current Costs of Payroll

Job Category	Wage/ Salary	Number of Employees	Hours per year	Total
I	$8	6	2,000	$96,000
II	$13	6	2,000	$156,000
III	$18	3	2,000	$108,000
IV	$22	2	2,000	$88,000
Manager	$50,000 per year	2	Salaried	$100,000
	Total	19		$548,000

Answer 1

1.Assuming all other costs and revenues remain same as before,the net effect on profitability is

$100000 - ( 2000 × $3 ×6) = $64000

So the owner's profit will reduce by $36000 due to the imposition of minimum wage. Out of which he will have to pay $12096 towards his new house. This will reduce his income further to $51904 after mortgage payments.

2. The three courses of actions are -

• Reduce operating hours of employees. This is means the existing 6 employees at initial level were working 2000 hours. Now their no. of hours get reduced but have to carry out the same work but in lesser time. Here it would be $11 ×6× 1455 = $96030. This wage cost is approximately as before minimum wage laws.
• Reduce staff and allocate some proportion of work to next category of workers. That is cutting down 2 workers and increasing operating hours by 46 hours per worker in a year. The cost tally comes to $11×4× 2184 = $96096. This method increases burden of work on existing staff in both category I and II.
• Increase price of final output and pass on the burden of minimum wage to customers.

3. From all the the options listed above, reducing no. of operating hours is relatively better option. This is because it raises productivity of entry level workers without having any morale impact on other category workers. Also it does not shift the burden as price increase to customers.