Many corporations allow CEOs to use the firm’s corporate jet for personal travel (see the Mini- Case “Company Jets” in Chapter 7 for more details). The Internal Revenue Service (IRS) requires that the firm report personal use of its corporate jet as taxable executive income, and the Securities and Exchange Commission (SEC) requires that publicly traded corporations report the value of this benefit to share-holders. An important issue is the determination of the value of this benefit. The IRS values a CEO’s personal flight at or below the price of a first- class ticket. The SEC values the flight at the “incremental” cost of the flight: the additional costs to the corporation of the flight. The third alternative is the market value of chartering an aircraft. Of the three methods, the first- class ticket is least expensive and the chartered flight is most expensive.
a. What factors (such as fuel) determine the marginal explicit cost to a corporation of an executive’s personal flight? Does any one of the three valuation methods correctly determine the marginal explicit cost?
b. What is the marginal opportunity cost to the corporation of an executive’s personal flight?