Turner, a Successful Executive, Is Negotiating a Compensation Plan with His

question 104

Multiple Choice

Turner, a successful executive, is negotiating a compensation plan with his potential employer. The employer has offered to pay Turner a $600,000 annual salary, payable at the rate of $50,000 per month. Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.

• A) If the employer accepts Turner's counteroffer, Turner will recognize $660,000 at the time the offer is accepted.
• B) If the employer accepts Turner's counteroffer, Turner will recognize as gross income $55,000 per month [($480,000 + $180,000)/12].
• C) If the employer accepts Turner's counteroffer, Turner will recognize $40,000 income each month for the year and $180,000 in year 5.
• D) If the employer accepts Turner's counteroffer, Turner must recognize imputed interest income on the $180,000 to be received in 5 years.
• E) None of these.

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Definitions:

AVC

Average Variable Cost, an economic metric reflecting the variable costs (such as labor and materials) per unit of output.

ATC

Average Total Cost, which is the sum of all production costs divided by the quantity of output produced, a critical factor in economic analysis of a company's efficiency.

Shut-down Point

The level of operation at which a firm's total revenue is equal to its total variable costs, below which it is more beneficial for a firm to cease production.

Average Variable Cost

The variable cost (cost that changes with production volume) divided by the quantity of output produced.