Norma's Cat Food

In: Business and Management

Submitted By kiteflyer
Words 357
Pages 2
Norma’s Cat Food of Shell Knob ships cat food throughout the country. Norma has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two and one-half days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Iowa.
a. If the company has $5 million per day in collections and $3 million per day in disbursements, how many dollars will the cash management system free up? Justify your answers.
b. If the company can earn 8 percent per annum on freed-up funds, how much will the income be? Justify your answers.
c. If the annual cost of the new system is $800,000, should it be implemented? Explain why or why not.

ANSWERS:

A. By implementing the local collection centers around the country, which includes multiplying $5 million a day and collections by 2 ½ days, Norma’s Cat Food of Shell Knob would free up $12,500,000. This, combined with the additional collection of daily disbursements of $3 million multiplied by 0.5 days slow down, equaling $1,500,000, would provide a total of $14 million in freed up funds for Norma’s Cat Food.

1. $5,000,000 daily collections × 2.5 days speed up = $12,500,000 additional collections

2. $3,000,000 daily disbursements × 0.5 days slow down = $1,500,000 delayed disbursements

3. $12,500,000 +$1,500,000 = $14,000,000 freed-up funds

B. If the company can earn 8 percent per annum on freed-up funds the income will be $14,000,000 freed up funds x 8% interest rate = $1,120,000 interest on freed up cash.

$14,000,000 * 8% = $1,120,000

C. Annual net savings = $1,120,000 - $800,000 = $320,000 if service is adapted.

Recommendation: Yes. Establish local…...

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