Marlin Inc. has annual sales of $600 million. Management has determined that an
ID: 2615073 • Letter: M
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