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

Explanation / Answer

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

There is a reduction of collection times by 3 days and average daily collection is $124000.

Thus the reduction in outstanding cash balances as a result of implementing the lockbox system= 3*124000=$372000

What is the daily dollar return that could be earned on these savings?

First we have to convert annual interest rate to daily using below formula,

Daily int rate= 1.06^(1/365)-1= 0.000159654

So daily dollar return=$372000*0.000159654= $59.39

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?

Let us convert annual int rate to monthly int rate using below formula,

1.06^(1/12)-1= 0.004867551

Monthly charge cookie cutter should pay can be calculated by multiplying savings by monthly int rate

=372000*0.004867551

maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the end of the month=$1810.73

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?

We will use preptuity due formula here

=(372000*0.004867551)/1.004867551

The maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the beginning of the month=$1801.96

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