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 $50,000 and her store made $105,000 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 $26,000 plus 17% of the store’s profits. Since the change, the store is performing much better, and she forecasts profits this year to be $240,000 (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?

Answer 1

Answer:

It is given that the store a profit of $105,000 last year and the salary paid to the manager is 50,000 (fixed). The net profit of the store is calculated below:

      Net Profit = Profit - Salary Paid

                        = 105,000 - 50,000

                         = 55,000

Thus, the net profit of the store is $55,000

Under the new payment scheme, the salary of the manager is $26,000 plus 17% of the profits. The expected profit of the store is 240,000.

The salary paid to the manager is calculated below:

Total Salary = $26,000 + 17% of $240,000

                      = $26,000 + ( 17/100 x $240,000)

                       = $26,000 + $40,800

                       = $66,800

Thus, the total salary paid to the manager is $66,800

The net profit of the store under new payment scheme is calculated below:

        Net Profit = 240,000 - $66,800

                           = $173,200

Thus, the net profit of the store under new payment scheme is $173,200

Conclusion:

It is seen form the above calculations that by changing the payment scheme, the owner of the store earns $118,200 more as compared to the previous profit ($173,200-$55,000).

Under the new payment scheme, the manager also makes more money. Previously, the salary of the manager is $65,000 and after the change, the salary of the manager is $66,800. Thus, the manager is above to earn $1,800 more as compared to the previous salary