The Jackson Supply Company Recently Started Using a Regional Lock-Box

question 89

Essay

The Jackson Supply Company recently started using a regional lock-box collection system.The controller for the company compared the float using the lock-box system with the float using the company's prior,one-location collection system.The controller found that the company was saving $2,600,000 in average float.The bank that provides the regional lock-box system requires that the company maintain a $500,000 compensating balance at all times.The bank also charges service fees of $120,000 annually.
Required: Calculate the percentage cost of net funds freed for Jackson Supply Company.

---

Definitions:

Fixed Expenses

Expenses that remain constant regardless of the amount of goods produced or sold, including lease payments, wages, and coverage costs.

Net Income

The profit or loss of a business after all expenses, taxes, and costs have been subtracted from total revenues.

Selling Price

The selling price is the amount a buyer pays to purchase a product or service from a seller.

Contribution Margin Ratio

The percentage of sales revenue remaining after variable costs are subtracted, indicating the portion contributing to covering fixed costs and generating profit.