Fagins, a Nationwide Department Store Chain, Currently Processes All of Its

question 23

Multiple Choice

Fagins, a nationwide department store chain, currently processes all of its credit sales payments at its St.Louis headquarters.The firm is considering the establishment of a lockbox arrangement with a Los Angeles bank to process payments from its customers in 10 western states.Average mailing time for customers from this region would be reduced from 3 days to 1.5 days.In addition, check processing and clearing time would be reduced from 4 days to 2.5 days.Annual collections from the western region are $150 million.Establishment of this lockbox system would reduce the compensating balance requirement at the firm's St.Louis bank by $600,000 and reduce annual payment processing costs at the St.Louis office by $30,000.Funds released by the lockbox arrangement can be invested elsewhere in the firm to earn 12 percent.The Los Angeles bank has agreed to process Fagins' customer payments "free of charge" provided that the firm maintains a minimum compensating balance of $1,500,000 in its account at the bank.What are the annual net benefits to Fagins of establishing a lockbox system with the Los Angeles bank (assume 365 days per year) ?

• A)$630,000
• B)$332,877
• C)$69,945
• D)$41,096

---

Definitions:

Cognitive Realms

Areas or aspects of mental processes and activities, including thinking, reasoning, and understanding.

High Expectations

The belief or hope that someone or something will achieve a high level of performance or success.

Privileged Communication

A legal concept that protects certain communications from being disclosed in court without the consent of the party who made the communication.

Legal Concept

A foundational idea or principle within the field of law that outlines rights, duties, procedures, and penalties, helping to structure legal reasoning and judgment.