As part of a union negotiation agreement, the United Clerical Workers Union conceded to be paid every two weeks instead of every week. A major firm employing hundreds of clerical workers had a weekly payroll of $1,000,000 and the cost of short-term funds was 12 percent. The effect of this concession was to delay clearing time by one week. Due to the concession, the firm ________.
A) realized an annual loss of $120,000
B) realized an annual savings of $120,000
C) increased its cash cycle
D) decreased its cash turnover

Question

Quizplus · Accepted Answer

The decision to pay the clerical workers every two weeks instead of every week delays the firm's payment by one week, resulting in a saving of $1,000,000 for that week. This corresponds to an annual savings of $52 million/week x 1 week = $52 million. At a 12% cost of financing, the company saves 12% x $52 million = $6.24 million, which is equivalent to $6,240,000 or approximately $6.2 million. Therefore, the company realized an annual savings of $120,000. Additionally, increasing the clearing time will decrease the cash cycle and increase cash turnover.

As Part of a Union Negotiation Agreement, the United Clerical