Question

Seiko’s current salary is $85,000. 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 $75,000 per year, but it allows employees to purchase one new car per year at a discount of $15,000. This discount qualifies as a nontaxable fringe benefit. In an effort to keep Seiko as an employee, Idaho Office Supply offers her a $10,000 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 $10,000 increase in salary? (Ignore payroll taxes.)

After-tax cost = ? (6,800 is not a correct answer)

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.)

Offer is better by =

c. What 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.)

Salary needed =

Answer 1

Please see step by step answer .

Seiko Current Salary $	85,000
Marginal Tax rate	32%
Present Company	Idaho Office
New Position will pay $	75,000
One new car purchased with discount $	15,000
( above treated as Non taxable fringe benefit)
To keep Seiko in the job , present Employer	10,000
increase salary $
Seiko after tax Income at Idaho Office would be
(Current Salary + Increase in Salary)- tax on salary after increase
Present Salary $-A	85,000
Additional Salary $-B	10,000
Total Salary after revision $(A+B)	95,000
Tax on above 32%* $ 95000	30,400
After tax salary position would be $ F	64,600
Offer by Other company
New Position will pay $ A	75,000
Tax rate 32% on $ 75000-B	24,000
offer salary after tax(A-B)=C	51,000
Discount of Car purchase( as above)-D	15,000
So , total Salary offer( C+D) $ E	66,000
So as per above analysis , New Employer ( CAR DEALER) give additional package to Seiko(E-F)	1,400
Last part
What salary Seiko need to receive fron Idaho office supply
to make her financially indifferent
Asume Seiko before tax salary at Idaho $	X
TAX RATE ( As above)	32%
After tax salary would be	X-32%*X
As per new offer which is slightly better than Idaho office $	66,000
So formula would be
X-32%X=$ 66000
x-0.32x= $ 66000
Thus 0.68x= $ 66000
so X = $66000/0.68	97,059
So Seiko before tax salary would be $ 97059 at Idaho's office to meet her other requirement