Thomas and Purnell are general partners in a partnership along with four limited partners. Ten percent of partnership profit is allocated to each of the limited partners, and the balance of the profits is allocated to Thomas and Purnell as follows:
1. Salaries of $40,000 and $60,000 to Thomas and Purnell, respectively.
2. A bonus to Thomas of 10% of sales in excess of $1,200.00
3. A bonus to Purnell of 5% of net income after the bonus.
4. Remaining profits to be allocated 60% and 40% respectively, to Thomas and Purnell.
The general partners have been approached by Wiggins, who has significant experience in the area of foreign sales and is seeking admission to partnership. Wiggins is confident that she can generate significant increases in sales and that any capital needed to finance the expansion will be raised and guaranteed by her. Furthermore, Wiggins is proposing that the existing profit agreement be modified as follows:
1. Wiggins will be allocated a salary of $40,000
2. A bonus to Wiggins of 15% of all international sales in excess of $500,000.
3. Thomas's bonus will be limited to domestic sales only.
4. Remaining profits to be allocated 40%, 40%, and 20% to Thomas, Purnell, and Wiggins, respectively.
The limited partners are in favor of admitting Wiggins, noting that their opportunities for increased profits would be improved. However, Thomas and Purnell are concerned that unless sales and profits grow significantly, they will receive a smaller allocation of profits than they did before Wiggins. Without Wiggins, the partnership is projecting domestic sales and profits of $1,450,000 and $280,000, respectively, for the next year. Thomas and Purnell feel that if their interest in profits increases by $16,000 and $24,000 respectively, they will be inclined to admit WIggins as a partner.
Assume that Wiggins is able to generate $700,000 of additional foreign sales which include a 40% gross profit margin and that the general and administrative expenses associated with this increase are 15% of such sales. Prepare an analysis for Thomas and Purnell that ummarizes their profit allocation with and without Wiggins.