Eagle Industries feels that a lockbox system can shorten its accounts receivable

Question

Eagle Industries feels that a lockbox system can shorten its accounts receivable collection period by 4 days. Credit sales are $2,700,000 per year, billed on a continuous basis. The firm has other equally risky investments with a return of 20%. The cost of the lockbox system is $8,000 per year. (Note: assume a 365-day year.)

A. What amount of cash will be made available for other uses under the lockbox system?
B. What net benefit (cost) will the firm realize if it adopts the lockbox system?
C. Should it adopt the proposed lockbox system? Yes or No.

Explanation / Answer

A. What amount of cash will be made available for other uses under the lockbox system?

The total time saved by establishing the lock box system = 4 Days.

Cash available for other use = Time saved * Daily Average Collections = 4 * 2,700,000 / 365 = $ 29,589

B. What net benefit (cost) will the firm realize if it adopts the lockbox system?

The Opportunity Cost = 20% * 29,589 = $ 5,917.8 or say $ 5,918

Cost of Lock box per annum = $ 8,000

Net cost if it adopts the lockbox system = $ 8,000 - $ 5,918 = $ 2,082

C. Should it adopt the proposed lockbox system? The Anser is No.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

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