Johan Jones owns a dress shop that has been very successful. He employs 3 sales

Question

Johan Jones owns a dress shop that has been very successful. He employs 3 sales associates who get paid $10 hour for a 40-hour week. He decides to open up another dress shop on the other side of town. He hires three more sales associates with the same pay arrangements. After three months, Johan notices he is not making the same profit he did. His sales have doubled and his expenses are the same proportion except for wages. He knows that each sales associate should receive $1,720 each month yet his total wages expense for the month is $12,040. He worries that he is not paying close enough attention to the old store. What could be his problem? Should he discuss this problem with all of the sales associates?

Explanation / Answer

With the stated pay arrangements, each sales associates should be paid

= ($10/hour x 40 hours/week x 4 weeks/month)

= $1600 per month

So, 6 associates should be paid $1600 x 6 = $9600 per month.

But question states that each salesperson should get $1720 each month. This difference may be caused by sales commission in addition to fixed salary of $1600.

Sales commission is a variable expense which varies directly with sales revenue. The higher the sales, the higher the sales commission. Therefore, even though sales have doubled, sales commission has increased, leading to lower profit. Johan may re-consider a revision of sales commission arrangement to ensure profits remain high.

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