(Cash receipts acceleration system) Peggy Pierce Designs Inc. is a verticallyintegrated, national manufacturer and retailer ofwomen's clothing.Currently, the firm has no coordinated cash management system. Aproposal, however, from the First Pennsylvania Bank aimed at speeding up cash collections is being examined by several ofPierce's corporate executives.

The firm currently uses a centralized billingprocedure, which requires that all checks be mailed to the Philadelphia head office for processing and eventual deposit. Under thisarrangement, all thecustomers' remittance checks take an average of 5 business days to reach the head office. Once inPhiladelphia, another 1 days are required to process the checks for ultimate deposit at the First Pennsylvania Bank.

Thefirm's daily remittances average $1.4 million. The average check size is $3,200. Pierce Designs currently earns 6 percent annually on itsmarketable-securities portfolio.

Under the proposedplan, First Pennsylvania said that they could reduce funds tied up by mail float to 3 days, and processing float will be eliminated. Funds would then be transferred twice each business day by means of automated depository transfer checks from local banks to the First Pennsylvania Bank. Each DTC costs $13. These transfers will occur all 270 business days of the year. Each check processed through the proposed cash collection system will cost $0.18.

a. What amount of cash balances will be freed up if Peggy Pierce Designs Inc. adopts the system suggested by FirstPennsylvania?

$ (Round to the nearestdollar.)

b. What is the opportunity cost of maintaining the current bankingsetup?

$ (Round to the nearestdollar.)

c. What is the projected annual cost of operating the proposedsystem?

$ (Round to the nearestdollar.)

d. What is the net annual gain or loss associated with adopting thesystem?

$ (Round to the nearestdollar.)

Should Peggy Pierce Designs adopt the newsystem?(Select the best choicebelow.)

A. Yes.PeggyPierceDesignsshouldadoptthenewsystembecausethesystemwillgeneratenetannualgain.

B. No.PeggyPierceDesignsshouldnotadoptthenewsystembecausethesystemwillgeneratenetannualloss.