It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposi
ID: 2719361 • 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 $127,000, 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?
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 $127,000, and the required rate of return is 6 percent per year. Assume 365 days per year.
Explanation / Answer
(a)
Reduction in collection time due to implementation of lockbox system = 3 days
Average daily collection = $127,000
Reduction in outstanding balances as a result of implementing the lockbox system = $127,000 * 3 days = $381,000
(b)
Total savings = $381,000
Annual rate of interest = 6%
Daily rate of interest = 1.061/365 – 1 = 0.0001597
Daily dollar return on these savings = $381,000 * 0.0001597 = $60.83
(c)
Maximum monthly that can be paid for lockbox system = Monthly return on the savings due to system
Monthly rate of return = 1.061/12 – 1 = 0.004868
Monthly savings = $381,000 * 0.004868 = $1,854.71
Maximum monthly charge = $1,854.71
(d)
In case the monthly payments are due at the beginning of month, the monthly payment calculated in previous part shall be discounted with the monthly rate to get the value at the beginning of month.
Maximum monthly payment = $1,854.71 / 1.004868 = $1,845.72
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