Southern Cross Ski Company of Santiago de Chile has sales and service centers in Argentina and Peru and also maintains a corporate wide account in dollars in Miami. Accounts are maintained in the currency of each country, but because of exchange rate volatility in the country in which it operates, Southern Cross uses the U.S. dollar for internal control purposes, Southern Cross maintains separate operating cash balance in each country at a level equal to two standard deviations above expected needs. Expected operating cash needs and one standard deviation of those needs, measured in dollars, are:

Southern Cross's Miami bank suggested the same level of safety could be maintained with less cash if all precautionary balances were combined in a central accounc. This would necessitate a South America-wide cash management system, which the Miami bank could provide.

a. How much lower would Southern Cross Ski company's total cash balances be if all precautionary balances were combined: Assume cash needs in each country are normally distributed and are independent of each other.

b. What other advantages might accrue to Southern Cross Ski Company from centralizing its cash holdings? Are these advantages realistic?

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Chile Argentina Expected cash need $ 5,000,000 3,000,000 2,000,000 800,000 Peru Bolivia $ 10,800,000 One standard deviation $ 1,000,000 400,000 300,000 40,000 $ 1,740,000