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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 $55,000 and her store made $115,000 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 $27,000 plus 16% of the store’s profits. Since the change, the store is performing much better, and she forecasts profits this year to be $250,000 (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

Gross profit of the store = $115,000

Salary of manager = $55,000

Net profit of the store = Gross profit - Salary of manager = $115,000 - $55,000 = $60,000

So, last year, owner made $60,000.

THIS YEAR

Gross profit of the store = $250,000

Fixed salary = $27,000

Commission = 16% of Gross Profit = 0.16 * $250,000 = $40,000

Net profit of the store = Gross profit - Fixed salary - Commission = $250,000 - $27,000 - $40,000 = $183,000

So, this year, owner made $183,000.

Calculate the increase in the income of the owner -

Increase in income = Money made this year - Money made last year = $183,000 - $60,000 = $123,000

Thus,

The owner will make $123,000 more because of this change.