It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposi

Question

It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s collection times. It is expected that the lockbox system will reduce receipt and deposit times to four days total. Average daily collections are $137,000, and the required rate of return is 6 percent per year. Assume 365 days per year.

What is the reduction in outstanding cash balances as a result of implementing the lockbox system? (Do not round intermediate calculations.)

What is the daily dollar return that could be earned on these savings? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the end of the month? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the beginning of the month? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the reduction in outstanding cash balances as a result of implementing the lockbox system? (Do not round intermediate calculations.)

Explanation / Answer

Ans: Calculation of reduction in outstanding balance Collection of 6 days= $137000*6 = $822000 Collection of 4 days= $137000*4 = $548000 Reduction in outstanding balan = $274000 ANs2 Average daily rate= (1+r)^(1/365)-1 0.00016 Daily doller return= $274000*.00016= $43.84

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