The Jackson Supply Company recently started using a regional lock-box collection system. The controller for the company compared the float using the lock-box system with the float using the company's prior, one-location collection system
The controller found that the company was saving $2,600,000 in average float. The bank that provides the regional lock-box system requires that the company maintain a $500,000 compensating balance at all times. The bank also charges service fees of $120,000 annually.
Required: Calculate the percentage cost of net funds freed for Jackson Supply Company.
What will be an ideal response?
Answer:
Gross savings using a lock-box system $ 2,600,000
Less: Required compensating balance for the lock-box system 500,000
Net savings using a lock-box system $ 2,100,000
$120,000 fees and expenses / $2,100,000 = 5.71% percentage cost of funds freed
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