It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposi
ID: 2653361 • Letter: I
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 $136,000, and the required rate of return is 5 percent per year. Assume 365 days per year.
What is the reduction in outstanding cash balances as a result of implementing the lockbox system?
What is the daily dollar return that could be earned on these savings? (Round your 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? (Round your 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? (Round your answer to 2 decimal places. (e.g., 32.16))
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 $136,000, and the required rate of return is 5 percent per year. Assume 365 days per year.
Explanation / Answer
Answer for subpoint a:
Average daily collections =$136,000.
Rate of return=5%.
Time taken for collection of cash before implementation of lock box system = 6 days.
Reduction on time taken for collection after implementation of lock box system=3 days.
Reduction in cash balance due to implementation of lockbox system=$136,000 * 3
=$408,000.
Answer for subpoint b:
Cost savings due to introduction of lock box system
Dollar return that could be earned on the money received fast=$136,000 * 3*5%
=$20,400.
Daily dollar return that could be earned on thest savings =$20,400/365 =$55.89.
Answer for subpoint c:
Maximum monthly charge that cookie cutter should pay =$20,400/12
=$1700.
Answer for c2.:
Per month interest rate=5%/12 =0.4166667%
Maximum monthly charge cookie cutter should pay for the lockbox system if the payment is made at the begining of the month =($1700/100.4166667)*100
=$1,692.95.
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