Anne Teak, the financial manager of a furniture manufacturer, is considering ope

Question

Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 450 payments a day will be made to lock boxes with an average payment size of $3,000. The bank’s charge for operating the lock boxes is $.50 a check. The interest rate is .012% per day.

If the lock box makes the cash available 2 days earlier, calculate the net daily advantage of the system. (Do not round intermediate calculations.)

What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

If the lock box makes the cash available 2 days earlier, calculate the net daily advantage of the system. (Do not round intermediate calculations.)

Explanation / Answer

Number of payments per day = 450 Avreage Payment size = 3000 No of days saved = 2 days Bank's Charges $0.5 Interest Rate 0.01% Reduction in collection float = Number of payments per day × Average payment amount × Reduction in collection float days Reduction in collection float = 450 x $3000 x 2 = $2,700,000 Daily interest earnings = Reduction in collection float × Daily interest rate Daily Interest saved = $2,700,000 x 0.012% = $324 Daily cost = Number of payments per day × Cost per payment Daily Cost = 450 x $0.50 $225 Net daily advantage = Daily interest earnings – Daily cost = $324 -$225 $99 Since the net daily advantage is positive, it is worthwhile to adopt the system. b) The break-even reduction number of days occurs when the net daily advantage of the system is zero Net daily advantage = 0 = Daily interest earnings – Daily cost Net Daily Advantage = [.00012 × (450 × $3,000 × Days)] – (450 × $.50) 450 x $3000 x Days saved x 0.012% = $225 Days saved 1.39 As long as the lock-box system reduces the collection delay by at least 1.39 days, the system is worthwhile.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.