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?

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Anthougogo Anthougogo · 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)