We saw earlier that salaries and wages are among the most common ways of earning an income. But now, we look at two other sources of income, viz. commissions and royalties.
Commissions are income based on the value of items sold. This form of payment is mainly for sales people, real estate agents, etc., where they earn a commission based on the percentage of the value of goods sold.
Example 1 : Ross earns 8% commission on the sale of every car he sells. Last month he sold 10 cars with a total value of $250,000. What is his commission earnings?
Ross’s commissions = 8% of 250,000 = $20,000
A related concept to the earning of commissions is that of retainer. A retainer is a fixed income earned that does not depend on the number of items sold. Typically, a lot of salespeople will have salaries that include a fixed retainer, and a variable commission (based on the number or value of the items sold).
Example 2 : John is a real estate agent on a retainer of $1500 per month plus a commission of 3% on the properties sold by him. Last month John sold properties worth $275,000. How much did he earn?
First of all, irrespective of any sales made, John earns a retainer of $1500 per month.
Next we need to work out the commission on his sales.
Commission = 3% of John’s sales
= 0.03 x 275,000 = $8,250
Total earnings = retainer earnings + commission earnings
= 1500 + 8250 = $9750
Royalties is another source of income based on the number of copies sold. Typically royalties are paid to a person who owns a copyright, and they include musicians, photographers, authors, etc.
For example, a musician who writes a piece of music is paid a royalty on the sale of his music (CD sales, or music downloads). Similarly, an author who writes a book is also paid a royalty based on the number of books or publications sold. And a photographer may earn royalty income whenever people use his/her photographs.
Royalties are calculated in the same way as commissions; that is, as a percentage of sales.
Example 3 : Rebecca is a songwriter who is paid a royalty of 9.5% on all sales of her music. Calculate the royalty Rebecca earns if CDs containing her music sell for $125,000
Royalty earnings = 9.5% of $125,000
= 0.095 x 125,000 = $11,875