Question

In: Accounting

In 2016, Jill, age 35, received a job offer with two alternative compensation packages to choose...

In 2016, Jill, age 35, received a job offer with two alternative compensation packages to choose from. The first package offers her $125,000 annual salary with no qualified fringe benefits, requires her to pay $3,200 a year for parking, and pay her life insurance premiums at a cost of $2,100. The second package offers $115,000 annual salary, employer-provided health insurance, annual free parking (worth $310 per month), $212,000 of life insurance (purchasing on her own would have been $2,100 annually), and free flight benefits (she figures that it will save her $6,250 per year). If Jill chooses the first package, she would purchase the health and life insurance benefits herself at a cost of $5,500 annually after taxes and spend another $6,250 in flights while traveling. Assume her marginal tax rate is 28 percent. (Use Exhibit 12-10.) (Round your intermediate computations to the nearest whole dollar amount.) a-1. Which compensation package should she choose? Package 1 offers her $125,000 annual salary with no qualified fringe benefits. Package 2 offers $115,000 annual salary plus health and life insurance benefits. a-2. How much would she benefit in after-tax dollars by choosing this compensation package instead of the other compensation package? b-1. Assume the first package offers $138,000 salary with no qualified benefits instead of $125,000 salary plus benefits. Which compensation package should she choose? Package 1 offers her $138,000 annual salary with no qualified fringe benefits. Package 2 offers $115,000 annual salary plus health and life insurance benefits. b-2. How much would she benefit in after-tax dollars by choosing this package?

Solutions

Expert Solution

a1.

In $

In $

Offer 1

Offer 2

Annual Salary

125000

115000

Tax @28%

35000

32200

Post Tax Salary

90000

82800

Reduction from In hand Salary through out of pocket expenditure
Parking 3200
Life Insurance cover 2100
Health Insurance 3400
Flight Expenses 6250
Total 14950

Perks:
Free Parking 3720
Life Insurance cover 2100
Free Flight Benefits 6250
Net In Hand Salary 75050

82800

a.2 - She Should Choose Package 2 as its more beneficial than PAckage 1 by  $ 7,750

b 1 - Assuming that Package 1 offers $ 138,000

In $ In $
Offer 1 Offer 2
Annual Salary 138000 115000
Tax @28% 38640 32200
Post Tax Salary 99360 82800
Reduction from In hand Salary through out of pocket expenditure
Parking 3200
Life Insurance cover 2100
Health Insurance 3400
Total 8700
Free Parking 3720
Life Insurance cover 2100
Net In Hand Salary 90660 82800

She should Choose Package 1

b2 - Its more beneficial by $ 7860


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