NT Calculating Interest

[ILLMAS]

Ok this is not tax related, but today I was caught off guard by client when she asked me to help her calculate interest on SALES COMMISSION, (not personal loan) she has with someone. She makes montly payments of 1k + 10% interest, so I told her monthly payment should be $1,100 (simple interst), but she told me no, that she needs to pay $1,111.11 which is closer to 11%. The way the person, calculates the interest is by dividing $1,000/.90 = $1,111.11. I have taken various finance courses in the past, but don't remember ever calculating interest that way, can someone please explain to me how and why (finacially) it's being calculated this way?

Thanks

[bstaxes]

I was taught I=PRT I=interest, P=principal, R=rate, T=time.

10% per month or per year? If it per year then the time has to be adjusted. If it is per month I would look for a different loan.

[ILLMAS]

I corrected the question, my client pays a commission to someone if she sells a product of their. So she pays the person a 10% commission a month based on sales.

[grandmabee]

I corrected the question, my client pays a commission to someone if she sells a product of their. So she pays the person a 10% commission a month based on sales.

then it would just be total sales times 10% to equal her commissions

[bstaxes]

Commission that's different. I agree with bcolleen.

[ILLMAS]

then it would just be total sales times 10% to equal her commissions

I agree, however she pays closer to 11% based on how the agent calculates the commission due: She sells $1,000 x .10 = $100, but the agents calculates it $1,000 / .90 = $1,111.11 - 1,000 = 111.11 so he gets $11 more, I have never seen or ever remember seeing interested being calculated in this manner, my client is concerned and wanted to know if this is a proper way of calculating interest? I could not find an answer, so I was wondering if someone here knows, if not it's okay I know there are other important things to worry about.

Thanks

[Catherine]

I agree, however she pays closer to 11% based on how the agent calculates the commission due: She sells $1,000 x .10 = $100, but the agents calculates it $1,000 / .90 = $1,111.11 - 1,000 = 111.11 so he gets $11 more, I have never seen or ever remember seeing interested being calculated in this manner, my client is concerned and wanted to know if this is a proper way of calculating interest? I could not find an answer, so I was wondering if someone here knows, if not it's okay I know there are other important things to worry about.

Thanks

Seems to me the agents calculate it that way because it works better for them.

10% of product sold is 0.10 x (sales total). End of discussion.

It's a standard problem of "direction" in reporting statistics -- going from a product failure rate of 1% to a product failure rate of 2% is a 1% increase -- it is also a 100% increase (doubling of the rate). The result depends on where you start, what direction you go, and at what you are looking. The careless, the unscrupulous, and the biased, can twist these to make answers that favor them (or their point). Which is why whenever someone presents you with statistics, you need to know where they started from and why they're using their chosen methodology. See a lovely little book entitled, "How to Lie With Statistics" Book link Should be required reading. When I was on my town's Finance Committee, we all read it; it was VERY useful.

[Lion EA]

If the agent is selling to the buyer for $1,111.11 so that your client can maker her $1,000, then the agent's commission is $111.11 which is 10% of the $1,111.11 sales price in the eyes of the buyer. As Catherine says, what direction is he looking.

[jainen]

>>10% of product sold is 0.10 x (sales total). End of discussion.<<

If you think that's how it ends, how do you think it begins? The formula describes a common split--you keep 90%, I'll keep 10%. You're thinking $1000 is 100%, but it really is only 90%. If that's your share, then the full amount must be $1111. So how much is she really selling? The formula is supposed to be applied to the total, not just your share.

One of the finest examples of this thinking is how banks create money out of literally nothing. They have to keep 10% in reserve, so you would think that if you deposit a thousand dollars they can lend out $900. But they say if you deposit $1000 they can lend out $9000. It all depends on how you define 100%.

Anyway, in my opinion the only question is whether the agent sells enough to earn whatever she earns?

[Catherine]

<snip>

Anyway, in my opinion the only question is whether the agent sells enough to earn whatever she earns?

I read it as a straight 10% commission question.

Looking back more carefully, the first question should be -- WHAT is the total she's paying interest on, under what specific terms? $1,000/month plus interest -- if someone's charging her 10%/month (11% - whatever) -- there may be violation of state rules on usury.

More questions to get the full story.

But percentages depend highly on what direction you're calculating from.