Question

Major Manufacturing currently has one bank account located in New York to handle all of its collections. The firm keeps an additional cash balance with the bank of $225,000 to pay for these services. It is considering opening a bank account with West Coast National Bank to speed up collections from its many California-based customers. Major estimates that the West Coast account would reduce collection time by 1 day on the $1.75 million a day of business that it does with its California-based customers. If it opens the account, it can reduce the balance with its New York bank to $175,000 because it will do less business in New York. However, West Coast will require an additional cash balance of $175,000. What would be the net daily benefit of opening the new account? (Enter your answer in dollars, not millions.)

Net daily benifits ____.

Answer 1

The net daily benefit of opening the new account would be $1,800,000, which is obtained by subtracting the cost of maintaining the additional cash balance from the savings gained by reducing collection time.

Step-by-step explanation:

The net daily benefit of opening the new account can be calculated by subtracting the cost of maintaining the additional cash balance from the savings gained by reducing collection time.

Currently, Major Manufacturing keeps a cash balance of $225,000 with its New York bank to pay for services. By opening an account with West Coast National Bank, Major can reduce this balance to $175,000. Additionally, it estimates that the new account will reduce collection time by 1 day on the $1.75 million of business it does with its California-based customers.

Therefore, the net daily benefit can be calculated as follows:

Savings from reduced cash balance = $225,000 - $175,000 = $50,000

Savings from reduced collection time = $1.75 million * 1 day = $1.75 million

Net daily benefit = Savings from reduced cash balance + Savings from reduced collection time

Net daily benefit = $50,000 + $1.75 million = $1,800,000