Question

3. In Year 4, the management of Orion made an offer of employment to a top-performing manager with its leading competitor. In addition to a base salary amount Orion's management offered the individual the opportunity to earn a bonus based on the firm's income above a base of $300,000. The bonus percentage is 3% of the firm income above a base level of $300,000 after tax and after bonus. The firm's tax rate is 25%. The manager wants you to estimate the bonus assuming the firm's actual total income for the next year will be $500,000. Required: Estimated Bonus to the Manager

Please show all work

Answer 1

Solution:

Actual total income before bonus and tax = $500,000

Let bonus amount = X

Now tax = ($500,000 - X) * 25% = $125,000 - 0.25X

Now

(Income after taxes and bonus - $300,000) *3% = Bonus Amount i.e. X

[$500,000 - X - $125,000 + $0.25X - $300,000) *3% = X

($75,000 - 0.75X)*3% = X

$2,250 - 0.0225 X = X

X = $2,250 / 1.0225 = $2,200.49

Therefore estimated bonus amount = $2,200.49