Question

CH30 Q7

Knob, Inc., is a nationwide distributor of furniture hardware. The company now uses a central billing system for credit sales of $248.40 million annually. First National, Knob’s principal bank, offers to establish a new concentration banking system for a flat fee of $290,000 per year. The bank estimates that mailing and collection time can be reduced by two days. Assume a 360-day year.

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 10%. 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.)

Interest savings            $ ___________________

c. Calculate the total annual cost of the old system if collection costs under the old system are $59,000 per year? (Enter your answer in dollars not in millions.)

Annual cost of old system            $ __197000______--

d. Should Knob accept First National's offer?

	No

Answer 1

A) Decrease in Receviables=

==$1,380,000

Increase in cash Blance =Decrease in receviables - Fee of bank

= $1,380,000-$290,000=$1,090,000

B. Interest Saving = $1090,000*10% =$109,000

C.

Colloection cost of old system =$59,000

Extra interest paid = $1,380,000*10%=$138,000

Total cost of old system = $138,000+$109,000=$197,000

D) No

Cost of Old system is $197,000 and cost of New system is $290,000. So cost of New system is more than old .