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 $75,000 and her store made $130,000 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 $34,000 plus 15% of the store’s profits. Since the change, the store is performing much better, and she forecasts profits this year to be $290,000 (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?

Answer 1

Last year, the store has earned a gross profit of $130,000and has paid a fixed salary of $75,000 to the manager.

Calculate net profit of the store -

Net profit = Gross profit - Salary paid to manager

Net profit = $130,000 - $75,000

Net profit = $55,000

The net profit earned by store last year was $55,000.

This year, the store is expected to earn a gross profit of $290,000.

This year manager would be paid $34,000 and a 15% of the store's profits.

Variable pay = 15% or $290,000

Variable pay = 0.15 * $290,000 = $43,500

Fixed pay = $34,000

Total salary paid = Variable pay + Fixed pay = $43,500 + $34,000 = $77,500

Net profit = Gross profit - Salary paid to managers

Net profit = $290,000 - $77,500

Net profit = $212,500

The net profit earned by store this year is $212,500

Increase in net profit = Net profit this year - Net profit last year

Increase in net profit = $212,500 - $55,000 = $157,500

Thus,

The owner will make $157,500 more because of this change.