The List Company, which can earn 7 percent on money market instruments, currently has a lockbox arrangement with a New Orleans bank for its Southern customers. The bank handles $3 million a day in return for a compensating balance of $2 million.
a. The List Company has discovered that it could divide the Southern region into a southwestern region (with $1 million a day in collections, which could be handled by a Dallas bank for a $1 million compensating balance) and a southeastern region (with $2 million a day in collections, which could be handled by an Atlanta bank by a $2 million compensating balance). In each case, collections would be one-half day quicker than with the New Orleans arrangement. What would be the annual savings (or cost) of dividing the Southern region?
b. In an effort to retain the business, the New Orleans bank has offered to handle the collections strictly on a fee basis (no compensating balance). What would be the maximum fee the New Orleans bank could charge and still retain List's business?