Case synopsis: Person B founded corporation W 20 years before. It was started as a mail order company and grew rapidly in recent years. As there is an extensive geographical dispersion of customers of the company, it presently employs a lockbox system with the collection place in City S. Person H, the treasurer of the company, is assessing the present cash collection policies. He identifies the number of payments to be handled by the lockbox service and the company’s present policy is to invest the payments in the short-term marketable securities. Due to this, the proceeds are wire-transferred to the headquarters of the corporation in order to meet payroll. Person H was approached by the third national bank on the possibility of establishing a banking system for Corporation W. Characters in the case: Corporation W Person H Person B Adequate information: The third national bank would accept every lockbox center’s regular payment through ACH (Automated clearinghouse). The transferred funds through ACH would not be available for utilization for a single day. To calculate: The ACH transfer cost at which the company is indifferent between the two systems.

Question

Want to see the full answer?

Answer 1

Question

Chapter 19, Problem 3M

Summary Introduction

Case synopsis:

Person B founded corporation W 20 years before. It was started as a mail order company and grew rapidly in recent years. As there is an extensive geographical dispersion of customers of the company, it presently employs a lockbox system with the collection place in City S.

Person H, the treasurer of the company, is assessing the present cash collection policies. He identifies the number of payments to be handled by the lockbox service and the company’s present policy is to invest the payments in the short-term marketable securities. Due to this, the proceeds are wire-transferred to the headquarters of the corporation in order to meet payroll.

Person H was approached by the third national bank on the possibility of establishing a banking system for Corporation W.

Characters in the case:

Corporation W

Person H

Person B

Adequate information:

The third national bank would accept every lockbox center’s regular payment through ACH (Automated clearinghouse).

The transferred funds through ACH would not be available for utilization for a single day.

To calculate: The ACH transfer cost at which the company is indifferent between the two systems.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

The controller of the Red Wing Corporation is in the process of preparing the company's 2024 financial statements. She is trying to determine the correct balance of cash and cash equivalents to be reported as a current asset in the balance sheet. The following items are being considered: a. Balances in the company's accounts at the First National Bank; checking $13,800, savings $22.400. b. Undeposited customer checks of $5,500. c. Currency and coins on hand of $610. d. Savings account at the East Bay Bank with a balance of $430,000. This account is being used to accumulate cash for future plant expansion (in 2026). e. $26,000 in a checking account at the East Bay Bank. The balance in the account represents a 20% compensating balance for a $130,000 loan with the bank. Red Wing may not withdraw the funds until the loan is due in 2027. 1. U.S. Treasury bills; 2-month maturity bills totaling $18,000, and 7-month bills totaling $23,000. Required: 1. Determine the correct balance of cash and…

Friendly Freddie’s is an independently owned major appliance and electronics discount chain with seven stores located in a Midwestern metropolitan area. Rapid expansion has created the need for careful planning of cash requirements to ensure that the chain is able to replenish stock adequately and meet payment schedules to creditors. Fred Ferguson, founder of the chain, has established a banking relationship that provides a $200,000 line of credit to Friendly Freddie’s. The bankrequires that a minimum balance of $8,200 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,200, the bank automatically extends the line ofcredit in multiples of $1,000 so that the checking account balance is at least $8,200 at month-end.Friendly Freddie’s attempts to borrow as little as possible and repays the loans quickly in multiples of $1,000 plus 2 percent monthly interest on the entire loan balance. Interest payments and any principal payments are paid at the…

Current Attempt in Progress Bramble Company is a very profitable small business. It has not, however, given much consideration to internal control. For example, in an attempt to keep clerical and office expenses to a minimum, the company has combined the jobs of cashier and bookkeeper. As a result, Bret Turrin handles all cash receipts, keeps the accounting records, and prepares the monthly bank reconciliations.The balance per the bank statement on October 31, 2020, was $17,820. Outstanding checks were No. 62 for $150.10, No. 183 for $186, No. 284 for $267.75, No. 862 for $200.70, No. 863 for $232.00, and No. 864 for $177.10. Included with the statement was a credit memorandum of $179.80 indicating the collection of a note receivable for Daisey Company by the bank on October 25. This memorandum has not been recorded by Daisey.The company’s ledger showed one Cash account with a balance of $21,870.00. The balance included undeposited cash on hand. Because of the lack…