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 $123,000, and the required rate of return is 4 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

Daily collection = $123,000

Annual interest rate = 4%

Number of days in a year = 365

Because of lockbox number of payment outstanding reduce from 6 days to 3 days.

a.

Reduction in outstanding cash balance = $123,000 × (6 – 3)

                                                               = $369,000

Reduction in outstanding balance because of lockbox is $369,000.

b.

Daily dollar return on outstanding balance = $369,000 × 4% /365

                                                                     = $40.44

Daily dollar return on outstanding balance is $40.44.

c-1

If payment is made at end of month then

Maximum amount the company can pays for the lockbox = $40.44 × 30

                                                                                            = $1,213.15

If payment is made at end of month then Maximum amount the company can pays for the lockbox is $1,213.15.

c-1

If payment is made at beginning of month then

Maximum amount the company can pays for the lockbox = $1,213.15 / (1 + 4% / 12)

                                                                                            = $1,209.12

If payment is made at end of month then Maximum amount the company can pays for the lockbox is $1,209.12.

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