A salesperson is offered the following compensation methods for one month: (A) a fixed salary of \$2,500, (B) a 5% commission on net sales, (C) a \$1,000 salary plus a 3% commission on net sales, and (D) a \$2,000 salary plus a 2% commission on net sales. If net sales for the month are \$40,000, which method will result in the highest earnings?

• A. A fixed salary of \$2,500
• B. A \$1,000 salary plus a 3% commission on net sales
• C. A 5% commission on net sales
• D. A \$2,000 salary plus a 2% commission on net sales

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the problem by identifying the four compensation methods and the net sales amount (\$40,000). The goal is to calculate the earnings for each method and compare them to determine the highest earnings.
2. Step 2: For Method A (fixed salary of \$2,500), note that the earnings are fixed and do not depend on net sales. Therefore, the earnings for Method A are \$2,500.
3. Step 3: For Method B (5% commission on net sales), calculate the commission by multiplying the net sales (\$40,000) by the commission rate (5%). Use the formula: \( \text{Commission} = \text{Net Sales} \times \text{Commission Rate} \).
4. Step 4: For Method C (\$1,000 salary plus 3% commission on net sales), calculate the commission by multiplying the net sales (\$40,000) by the commission rate (3%), then add the fixed salary (\$1,000). Use the formula: \( \text{Earnings} = \text{Fixed Salary} + (\text{Net Sales} \times \text{Commission Rate}) \).
5. Step 5: For Method D (\$2,000 salary plus 2% commission on net sales), calculate the commission by multiplying the net sales (\$40,000) by the commission rate (2%), then add the fixed salary (\$2,000). Use the formula: \( \text{Earnings} = \text{Fixed Salary} + (\text{Net Sales} \times \text{Commission Rate}) \). Compare the earnings from all methods to determine which one results in the highest earnings.