J-Mart, a nationwide department store chain, processes all its credit sales paym

Question

J-Mart, a nationwide department store chain, processes all its credit sales payments at its suburban Detroit headquarters. The firm is considering the implementation of a lockbox collection system with an Atlanta bank to process monthly payments from its southeastern region. Annual credit sales collections from the region are $60 million. The establishment of the lockbox system would reduce mailing, processing, and check-clearing time from 8 days currently to 3.5 days, reduce company processing costs by $25,000 per year, and reduce the compensating balance of its Detroit bank by $200,000. The Atlanta bank would not charge any fee for the lockbox service but would require J-Mart to maintain a $500,000 compensating balance. Funds released by the lockbox arrangement could be invested elsewhere in the firm to earn 15 percent before taxes. Determine the following:

Explanation / Answer

A. Amount of funds released by the lockbox arrangement $ Processing Costs reduction 25000 Reduction in Mailing and Check Clearing Costs 739726 (From the current period of 8 days, reduction to 3.5 days therefore 4.5 days incremental reduction) Worked out as 60 million USD/365 X 4.5 Reduction in Bank Balance -200000 564726 B. Pre-tax earnings on the funds released Earnings on Funds released @ 15% 84708.9 C. Benefits earned by J-Mart Pre-tax benefits on the switchover to the lockbox arrangement 764726

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