J-Mart, a nationwide department store chain, processes all its credit sales paym
ID: 2452643 • Letter: J
Question
J-Mart, a nationwide department store chain, processes all its credit sales payments at its suburban Detroit Headquarters. The firm is considering the implementation of a lockbox collection system with an Atlanta bank to process monthly payments from it southeastern region. Annual credit sales collections from the region are $60 million. The establishment of the lockbox system would reduce mailing, processing, and check-clearing time from 8 days currently to 3.5 days, reduce company processing costs by $25,000 per year, and reduce the compensating balance of its Detroit bank by $200,000. The Atlanta bank would not charge any fee for the lockbox service but would require J-Mart to maintain a $500,000 compensating balance. Funds released by the lockbox arrangement could be invested elsewhere in the firm to earn 15 percent before taxes. Determine the following.
A. the amount of funds released by the lockbox agreement.
B. The annual (pretax) earnings on the released funds.
C. The annual net (pretax) benefits to J-Mart of establishing the lockbox system with Atlanta bank.
Explanation / Answer
A. Amount of funds released by the lockbox arrangement $ Processing Costs reduction 25000 Reduction in Mailing and Check Clearing Costs 739726 (From the current period of 8 days, reduction to 3.5 days therefore 4.5 days incremental reduction) Worked out as 60 million USD/365 X 4.5 Reduction in Bank Balance -200000 564726 B. Pre-tax earnings on the funds released Earnings on Funds released @ 15% 84708.9 C. Benefits earned by J-Mart Pre-tax benefits on the switchover to the lockbox arrangement 764726
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.