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 three days total. Average daily collections are $124,000, and the required rate of return is 6 percent per year. Assume 365 days per year.

a. What is the reduction in outstanding cash balances as a result of implementing the lockbox system? Cash balance reduction $

b. What is the daily dollar return that could be earned on these savings? (Round your answer to 2 decimal places. (e.g., 32.16)) Dollar return $

c-1 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? (Round your answer to 2 decimal places. (e.g., 32.16)) Maximum monthly charge $

c-2 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?

Explanation / Answer

Average Daily Collections 124000 Collections Per Year 45260000 Average Amount Tied up in Normal Clearing(6 Days) 744000 (a) Average Amount Tied Up After Using Lock Box(3 Days) 372000 (b) Reduction in Outstanding Cash Balance 372000 (a)-(b) Savings on Interest of Borrowings Per Year 22320 (372000*6/100) Monthly Saving on Interest 1860 Maximum Amount That Can be Charged by bank if Payment is Due at the end of the Month 1860 IT will be the same as Interest Accrues at the end of every Month Maximum Amount That Can be Charged by bank if Payment is Due at the beginning of the Month 20460 Interest Accrues at the End of Every month, Thus Payment for the First month will not Include Interest Savings, Thus Interest Savings will be considered for 11 Months instead of 12 Maximum Monthly Charges 1705

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

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