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
Ans: Fixed salary = 50,000 where profit was 110,000
New salary is 40,000 + 5% of profit where profit is 300,000. Variable salary = 5% of 300,000 = 15,000. Thus, total salary = 40,000 + 15,000 = 55,000
Net profit of Owner = 300,000 - 15,000 = 285,000 which means owner profit rises from 110,000 to 285,000 which says there is rise in profit of 175,000.
Manager makes 5,000 more money under this scheme.
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