Anne Teak, the financial manager of a furniture manufacturer, is considering ope
ID: 2739613 • Letter: A
Question
Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 900 payments a day will be made to lock boxes with an average payment size of $2,500. The bank’s charge for operating the lock boxes is $.40 a check. The interest rate is .015% per day.
a-1. If the lock box makes the cash available 2 days earlier, calculate the net daily advantage of the system. (Do not round intermediate calculations.)
a-2. Is it worthwhile to adopt the system?
b. 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.)
Explanation / Answer
Part a-1
Reduction float = no. of checks per day x payment size per check x No. of days reduced
= 900 x 2500 x 2
= 4500,000
Interest saving = Reduction float x Interest rate
= 4,500,000 x 0.00015
= 675
Now we will reduce the cost of lock box system per day:
Cost per day = no. of checks per day x cost per check
= 900 x 0.40
= 360
Net daily advantage = Interest saving – cost per day
= 675 -360
= 315
Part B
Yes, since the net daily advantage is positive, it is worthwhile to adopt the lock box system.
Part C
Minimum required reduction in time would be number of days that equates both interest saving and cost per day.
Interest saving = cost per day
no. of checks per day x payment size per check x No. of days reduced x interest rate = no. of checks per day x cost per check
900 x 2,500 x No. of days reduced x 0.00015= 900 x 0.40
No. of days reduced = 360/ (900 x 2500 x 0.00015)
= 1.07 days
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