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 Marlinshould accept Third National Bank’s proposal.

Explanation / Answer

Cost Already Inccured by Marlin Inc. with out this proposal is

Opportunity Cost of Money due to lag in payment for 6 days = 600000000*6/365*10% = 986301.4

Cost If the Marlin accepts the proposal

Opportunity Cost of Money due to lag in payment for 2 days = 600000000*0.1*2/365 = 328767.1

Annual Fixed fees = 200000

Fees on percentage Basis = 600000000*0.02% = 120000

Cost of compensating Balance needs to maintain in third bank is = 3000000*10% = 300000

Less:- Reduction in accounting cost due to this proposal = 250000

TOTAL = 698767.1

So It is beneficial to accept the proposal

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