Sunny Sports, Inc. is a retailer of outdoor sporting goods. It sells to customer

Question

Sunny Sports, Inc. is a retailer of outdoor sporting goods. It sells to customers all over the U.S. and Canada, and all receipts come in to its headquarters in Las Vegas. The firm's average accounts receivable balance is $3.0 million, and they are financed by a bank loan at a 6.5% annual interest rate. The firm is considering setting up a regional lockbox system to speed up collections, and it believes this would reduce receivables by 15%. If the annual cost of the system is $13,500, what pre-tax net annual savings would be realized?

Explanation / Answer

average accounts receivable 3000000 bank interest 6.50% reduction in AR 15% so savings in cost annually 29250 (15%*3000000*6.5%) Less:annual cost 13500 net annual savings 15750

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