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Required Compensating Balances

X-Foods Co is thinking about choosing a local bank as its primary bank. With this bank, the company expects to have on average total charges for services of $10,000 for a 30-day month. The bank has an annual earnings credit allowing (ECR) of 2%, and reserve requirements of 10%.

QUESTION(s)

What is the firms required balance that must be held on average in place of the $10,000 monthly service charges?

As an average collected balance (ACB) [before reserve requirements are deducted, i.e., including (1-RR) in the calculation]; NOTE: ACB = [Monthly Service Charge] / [(ECR/365) x D](1-RR)].

Average Required Collected Balance _______________________

As an average investable (available) balance, excluding (1-RR) in the calculation].

Average Required Investable (Available) Balance ______________________

NOTE: Investable Balance Required = [Monthly Service Charge] / [(ECR/365) x D]