Question

Recently, the owner of KFC Franchise decided to change how she compensated her top manager. Last year, the manager received a fixed salary of GHC50,000 and KFC made GHC110,000 in profits (excluding the manager’s compensation). She feared that her store’s performance was connected to the top manager shirking on the job and expected that changes to her top manager’s compensation structure would improve sales. Therefore, this year she decided to offer him a fixed salary of $40,000 plus 5 percent of the store’s profit. Since the change, the store is performing much better, and she forecasts profits this year to be $300,000 (again, excluding the manager’s compensation). Assuming the change of compensation is the reason for the increased profits, and 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

Old payment Scheme

Profit of the store = 110,000

Manager's salary = 50,000

Calculate the money made by the owner -

Money made by the owner = Profit of the store - Manager's salary = 110,000 - 50,000 = 60,000

Under old payment scheme, the money made by owner is 60,000.

New payment scheme

Profit of the store = 300,000

Salary of the manager = 40,000

The manager will get 5% of the profit.

Share of profit paid to manager = 300,000 * 0.05 = 15,000

Total amount paid to manager = Salary + share of profit = 40,000 + 15,000 = 55,000

Calculate the money made by the owner -

Money made by the owner = Total profit - Total amount paid to manager = 300,000 - 55,000 = 245,000

So,

Under new payment scheme, the money made by owner is 245,000.

Calculate the increase in money made by the owner -

Increase = Money made under new payment scheme - Money made under old payment scheme = 245,000 - 60,000 = 185,000

The owner will make $185,000 more because of this change.

Under old payment scheme, manager earned 50,000 while under the new payment scheme, manager makes 55,000

So,

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