Currently Nemonix is using a decentralized collection system whereby customers mail their checks to one of the firm's eight regional locations. Its annual sales are $95 million. Checks are deposited each business day in a local bank and the amount of the deposit is sent to the firm's concentration bank in Dallas. The average time between deposit in the local bank and the availability of those funds, in Dallas, to Nemonix is 6 days. Nemonix has determined that the use of wire transfers would reduce the float by four days, but the transfer will cost $7.50. If transfers will be made on the 250 days that banks are open each year, should Nemonix switch to the wire transfer system? Assume that Nemonix can earn 8% on the funds released through this more efficient transfer.

Question

Gia Robbins

Business

15 April, 02:44

Currently Nemonix is using a decentralized collection system whereby customers mail their checks to one of the firm's eight regional locations. Its annual sales are $95 million. Checks are deposited each business day in a local bank and the amount of the deposit is sent to the firm's concentration bank in Dallas. The average time between deposit in the local bank and the availability of those funds, in Dallas, to Nemonix is 6 days. Nemonix has determined that the use of wire transfers would reduce the float by four days, but the transfer will cost $7.50. If transfers will be made on the 250 days that banks are open each year, should Nemonix switch to the wire transfer system? Assume that Nemonix can earn 8% on the funds released through this more efficient transfer.

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Answers (1)

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Leonard Mckenzie · Answer 1

A) Yes; savings of $106,600

Explanation:

the total cost of making 250 money transfers = 250 transfers x $7.50 per transfer = $1,875 x 8 banks = $15,000

Neumonix can earn 8% on the funds released, so their total additional revenue = ($95,000,000 / 250 transfers) x 8% = $380,000 x 8% = $30,400 x 4 days = $121,600

Neumonix total savings = additional revenue - additional costs = $121,600 - $15,000 = $106,600