The Essex Company found that an average of 10 days elapses between the time a customer's payments are received and the deposited funds clear the customer's bank and become usable by the firm. Essex's annual sales are $240 million. (Assume 365 days per year when converting from annual data to daily data or vice versa.) What is the increase in Essex's average cash balance, assuming it can reduce the time required to process customer payments by 3 days through more efficient payment processing methods?

Question

Quizplus · Accepted Answer

Step 1: Calculate the average daily sales
240 million/365 = $657,534.25

Step 2: Calculate the current average cash balance held by Essex
10 days x $657,534.25 = $6,575,342.50

Step 3: Calculate the reduction in average cash balance with more efficient payment processing methods
3 days x $657,534.25 = $1,972,602.50

Step 4: Calculate the new average cash balance held by Essex
$6,575,342.50 - $1,972,602.50 = $4,602,740

Therefore, the increase in Essex's average cash balance is $4,602,740.

The best answer is (C) because it is the only option that correctly calculates the reduction in average cash balance with more efficient payment processing methods and subtracts it from the current average cash balance to find the new average cash balance. The other options either do not take into account the reduction in average cash balance or use incorrect calculations.

The Essex Company Found That an Average of 10 Days