Decision Making in Finance Paycheck Example

1. Decision Making in FinancePaycheck Example Student Activity Sheet 1: You Have to Get Money to Make Money

2. 1. John is considering three job offers in educational publishing. • One is a full-time position as an editor that pays a salary of $42,500 per year. • Another is a full-time position as an e-Learning designer that pays an hourly wage of $24.75. The job assumes five 8-hour days per week. • The final offer is for a sales representative that pays a 7% commission. Sales representatives typically sell an average of $80,000 per month in textbooks. Record the income information for the editor, designer, and sales representative in Row 1 of The Paycheck Example.

3. 7% commission off of $80.000 in sales per month $42,500 per year $24.75 per hour

4. 2. Estimate the gross annual income for each job offer. Record your estimate in Row 3 of Job Summary Table 1. Use the workspace for any calculations that are needed to determine the income.

5. 7% commission off of $80,000 in sales per month $42,500 per year $24.75 per hour None 24.75 • 40 • 52 $80,000 • 0.07 • 12 $42,500 $51,480 $67,200

6. 3. Estimate the gross monthly income for each job offer. For the purposes of his comparison, John assumes that each job pays monthly. Record the amount in the gross monthly income box.

7. 7% commission off of $80,000 in sales per month $42,500 per year $24.75 per hour None 24.74• 40 • 52 $80,000 • 0.07 • 12 $42,500 $51,480 $67,200 42,500 ÷ 12 51,480 ÷ 12 67,200 ÷ 12 $4,290 $5,600 $3,541.67

8. 4. Based on the gross monthly income, which job do you recommend John take? Why? 5. Determine the after-tax income for each job offer. Use the following information: • The U.S. government deducts Social Security (6.2%) and Medicare (1.45%) will be used for A, B, and C. • John will deduct 25% of gross income to cover federal income tax and 6% State Income for A, B and C. Record your estimate in Row 7 of Job Summary Table 1. Use Row 6 for any calculations that are needed to determine the income.

9. 7% commission off of $80,000 in sales per month $42,500per year $24.75 per hour None 24.75 • 40 • 52 $80,000 • 0.07 • 12 $42,500 $51,480 $67,200 42,500 ÷ 12 51,480 ÷ 12 67,200 ÷ 12 $4,290.00 $5,600 $3,541.67 • 0.3865 • 0.3865 • 0.3865 $2,172.81 $2,631.91 $3,435.60

10. 6. John determines that he needs at least $3,000 per month in after-tax income to cover his monthly expenses. Based on this budget estimate, are there any jobs that John should not take? Why?

11. Another consideration in comparing jobs is the benefits each provides, such as health insurance, retirement plan, vacation time, and sick leave. • The editor position includes two weeks of paid vacation and five paid sick days per year, paid health insurance, life insurance costing $35 per month, and a fully paid retirement plan. • The designer position includes five paid vacation days and three paid sick days per year, 10% for health insurance, life insurance costing $35 per month, and a retirement plan that costs 3% of after-tax income. • The sales position has no paid vacation or sick days, 15% for health insurance, paid life insurance, and a retirement plan costing $400 per month.

12. 7. Estimate the monthly cost that will be deducted from John’s pay for benefits. Use the following information: • John plans on taking two weeks (10 days) for vacation per year. • In the past, John averaged three sick days per year. • John plans to purchase life insurance and save for his retirement. Record your estimate in Job Summary Table 1 in Rows 8 through 12. 8. Estimate the monthly take-home income in Row 13 of Job Summary Table 1.

13. 7% commission off of $80,000 in sales per month $42,500 per year $24.75 per hour None 24.75 • 40 • 52 $80,000 • 0.07 • 12 $42,500 $51,480 $67,200 Assumes 5 days’ unpaid 2,631.91(12) = 31,582.92 Leave: 31,582.92/260= $121.47 Per day 121.47*5=607.35 Average monthly cost: $607.35/12 = $50.61 42,500 ÷ 12 51,480 ÷ 12 67,200 ÷ 12 $4,290 $5,600 $3,541.67 3,541.67 • 0.3865 4, 290 • 0.3865 5,600 • 0.365 3,435.60(12) = 41,227.20 Leave: 41,227.20/260= 158.57 Per day 158.57(10)= 1,585.70 Monthly cost: 1585.70/12 =132.14 $2,172.81 $2,631.91 $3,435.60 Given 10 days, takes 10 days: $0 cost $50.61 $132.14 Given 5 days, takes 3 days: $0 cost Given 3 days, takes 3 days: $0 cost $39.39 Employer paid: $0 cost 10% of after-tax income: 263.19 15% of after tax income: 515.34 157.57(3)=472.71 472.71/12 = 39.39 Employer paid: $0 cost $35 cost per month $35 cost per month Employer paid: $0 cost 3% of after-tax income: $78.96 cost $400 cost per month $2,137.81 $2,204.15 $2,348.73

14. 9. Based on the completed Job Summary Table 1, which job do you recommend that John take? Explain your recommendation based on the net income. 10. Are there any factors that could affect the accuracy of the estimated net incomes? If yes, does this change your recommendation? Explain your reasoning. All of the calculations depend on the assumptions that were made, including monthly budget needs, desired vacation, estimated sick leave, and the desire to save for retirement. For example, an unexpected illness could drastically change the recommendation.

15. 11. Are there any other factors that John should consider when deciding which job to take? If yes, does this change your recommendation? Explain your reasoning. Sales jobs are risky because they are based on an economy that may have ups and downs. Holidays are not considered in this analysis. This may affect the hourly wage position, unless the employer considers holidays as paid leave.