Question

Seiko’s current salary is $130,000. Her marginal tax rate is 32 percent and she fancies European sports cars. She purchases a new auto each year. Seiko is currently a manager for Idaho Office Supply. Her friend, knowing of her interest in sports cars, tells her about a manager position at the local BMW and Porsche dealer. The new position pays only $113,100 per year, but it allows employees to purchase one new car per year at a discount of $23,000. This discount qualifies as a nontaxable fringe benefit. In an effort to keep Seiko as an employee, Idaho Office Supply offers her a $12,700 raise. Answer the following questions about this analysis.

A. What is the annual after-tax cost to Idaho Office Supply if it provides Seiko with the $12,700 increase in salary? (Ignore payroll taxes.)

b-1. Financially, which offer is better for Seiko on an after-tax basis?
Car dealer's offer

Current employer's offer

Both offers

b-2. By how much is the offer better for Seiko on an after tax basis (Assume that Seiko is going to purchase the new car whether she switches jobs or not.)

C. What before-tax salary would Seiko need to receive from Idaho Office Supply to make her financially indifferent (after taxes) between receiving additional salary from Idaho Office Supply and accepting a position at the auto dealership? (Round your intermediate computations to the nearest dollar amount.)

Answer 1

A.)	The annual after-tax cost to Idaho Office Supply
	=( Current salary + Increment ) x (1 -tax rate )
	= (130,000 + 12,700 ) x ( 1 - 32% )
	= 142,700 x 68%
	= $ 97,036
b-1)	Car dealer's offer
	= New salary x ( 1 -tax rate ) + Discount
	= ( 113,100 x ( 1 - 32% ) ) + 23,000
	= ( 113,100 x 68% ) + 23,000
	= 76,908 + 23,000
	= $ 99,908
	Differential benefit	$2,872	( 99,908 - 97,036 )
	Car dealer's offer is better for Seiko on an after-tax basis.
b-2.)	The offer is better by $ 2,872 on an after tax basis.
C.)	Before tax salary at indifferent point
	= 130,000 + 12,700 + ( 2,872 / ( 1-32%) )
	= 130,000 + 12,700 + 4,224
	= $ 146,924