Maxwell Is Trying to Decide Whether to Accept a Salary

question 21

Multiple Choice

Maxwell is trying to decide whether to accept a salary of $60,000 or a salary of $25,000 plus a bonus of 20% of net income after salaries and bonus as a means of allocating profit among the partners. Salaries traceable to the other partners are estimated to be $75,000. What amount of income would be necessary so that Maxwell would consider the choices to be equal?

• A)$175,000
• B)$210,000
• C)$285,000
• D)$310,000

---

Definitions:

Opportunity Cost

The cost of forgoing the next best alternative when making a decision, used to evaluate the trade-offs in resource allocation.

Accounting Profits

The total revenue of a company minus the explicit costs and expenses directly related to its operations, as shown in its financial statements.

Economic Profits

The difference between a firm's total revenue and its opportunity costs; also known as supernormal profit.

Price Elasticity Of Demand

A measure of how sensitive the quantity demanded of a good is to a change in its price.