Question

two months ago, the owner of a car dealership (and a current football star) significantly changed his sales manager’s compensation plan. Under the old plan, the manager was paid a salary of $6,000 per month; under the new plan, she receives 2 percent of the sales price of each car sold. During the past two months, the number of cars sold increased by 40 percent. But the dealership’s margins (and profits) significantly declined. According to the sales manager, “consumers are driving harder bargains and I have had to authorize significantly lower prices to remain competitive. “What advice would you give the owner of the dealership?

Short answer

The owner should fall back on the initial wage of the manager and add incentives based on profits, followed by purchasing inputs from different manufacturers to reduce the cost of the inputs.

Step-by-step solution

Introduction

Under competitive markets, producers are likely to try to increase their profits as much as possible. Such decision can only happen if his cost is lower than the revenue generated after selling cars.

Total revenue indicates the profit the producer gains after selling a product at a preceding price level.

Explaining the business situation concerning the car owner of car dealership decisions.

The dealer is concerned about the competitive situation that reduces its price, which results in a decrease in profit margins. The dealer should understand that he has to reduce costs to increase his revenue. The cost includes purchasing cars from manufacturers and assigning managers at different locations.

Reducing the manager's wage to a fixed level of $6000 and purchasing cars from a manufacturer with lower costs would increase the level of the revenue generated by the dealer. Moreover, if the producer pays an incentive to the manager of a certain percentage share of the profit would also increase the manager's productivity.