Marlin Inc. has annual sales of $600 million. Management has determined that an

Question

Marlin Inc. has annual sales of $600 million. Management has determined that an average of 6 days elapses between the time customers mail their payments and when the funds are available to the firm. Third National Bank has a program whereby the float can be reduced by 4 days. The program would cost Marlin $200,000 in annual fixed fees to the bank, as well as a .02% fee on the annual volume of sales. Marlin will also be required to have a compensating balance of $3,000,000 at Third National Bank.

Additionally, Marlin will be able to reduce labor costs in its accounting department by $250,000. Marlin can earn 10 percent (pretax) on its investments.

Show computations which would indicate whether or not Marlin should accept Third National Bank’s proposal.

Explanation / Answer

Reduction in costs for Marlin if it accepts Third National bank's Proposal: Calculate incremental benefit for 2 days (6-4 days)

Additional Costs to be born if marlin accepts Third National Bank's proposal:

Decision: As Costs are greater than benefits, Marlin is better off by not taking services from Third national bank.

Note: Decision may change accordingly if we take 1 year = 240 operating working days.

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