Question

Sylvana is given a job offer with two alternative compensation packages to choose from. The first package offers her $250,000 annual salary with no qualified fringe benefits. The second package offers $235,000 annual salary plus health and life insurance benefits. If Sylvana were required to purchase the health and life insurance benefits herself, she would need to pay $10,000 annually after taxes. Assume her marginal tax rate is 35 percent.
Required:
a. Which compensation package should she choose and by how much would she benefit in after-tax dollars by choosing this package?
b. Assume the second package offers $240,000 plus benefits instead of $235,000 plus benefits. Which compensation package should she choose and by how much would she benefit in after-tax dollars by choosing this package?

Answer 1

Answer:

Sylvana

a. Compensation package to choose = 2nd Package

After-tax dollars benefit  for choosing the 2nd Package = $3,250

b. Compensation package to choose = 2nd Package

After-tax dollars benefit for choosing the 2nd Package = $6,500

Explanation:

a) Data and Calculations:

                                   1st Package     2nd Package

Annual salary               $250,000       $235,000

Fringe benefits             $0                        10,000

Health & Life Insurance   (10,000)      $0

Taxable income           $240,000      $245,000

Taxes (35%)                     (84,000)         (85,750)

Net pay                         $156,000       $159,250

Net benefit of 2nd Package over 1st Package = $3,250 ($159,250 - $156,000)

                                   1st Package     2nd Package

Annual salary               $250,000       $240,000

Fringe benefits             $0                        10,000

Health & Life Insurance   (10,000)      $0

Taxable income           $240,000      $250,000

Taxes (35%)                     (84,000)         (87,500)

Net pay                         $156,000       $162,500

Net benefit of 2nd Package over 1st Package = $6,500 ($162,500 - $156,000)