Knob, Inc., is a nationwide distributor of furniture hardware. The company now u
ID: 2764268 • Letter: K
Question
Knob, Inc., is a nationwide distributor of furniture hardware. The company now uses a central billing system for credit sales of $226.80 million annually. First National, Knob’s principal bank, offers to establish a new concentration banking system for a flat fee of $230,000 per year. The bank estimates that mailing and collection time can be reduced by four days. a.By how much will Knob’s cash balances be increased under the new system? (Enter your answer in dollars not in millions.) Increase in cash balance $ b.Assume that the borrowing rate is 11%. How much extra interest income will the new system generate if the extra funds are used to reduce borrowing under Knob’s line of credit with First National? (Enter your answer in dollars not in millions.) Total cost $ c.Calculate the total cost of old system if collection costs under the old system are $53,000 per year? (Enter your answer in dollars not in millions.)
Explanation / Answer
a) Receivable T/o=credit Sales/Receivable
mailing and collection time=365/Receivable T/o=(365/credit Sales)*Receivable
=>Receivable=mailing and collection time*(credit Sales/365)
original Receviable =(X)*( $226.80 million/365)
Receviable after new concentration banking system=(X-4)*( $226.80 million/365)
therefore ,
reduction in receivables=original Receviable-Receviable after new concentration banking system
reduction in receivables=(X)*( $226.80 million/365)-(X-4)*( $226.80 million/365)
=>reduction in receivables=4*( $226.80 million/365)=4*( $226800000/365)
=>reduction in receivables=$ 2485479.45
Increase in cash balance $2485479.45 due to reduction in receivables and Decrease in cash balance $230,000 due to new concentration banking system for a flat fee per year.Thus net cash balance increases by $2485479.45-$230,000=$ 2255479.45.
therefore cash balances increase by $ 2,255,479.45 under the new system.
b)extra interest income will the new system generate if the extra funds are used to reduce borrowing under Knob’s line of credit with First National=$ 2,255,479.45 *.11 per year=$ 248,102.74 per year.
c)the total cost of old system if collection costs under the old system are $53,000 per year
=$ 248,102.74 + $ 53,000 per year
=$ 301102.74 per year
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