Anne Teak, the financial manager of a furniture manufacturer, is considering ope

Question

Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 650 payments a day will be made to lock boxes with an average payment size of $2,000. The bank’s charge for operating the lock boxes is $.40 a check. The interest rate is .012% per day.

If the lock box makes the cash available 2 days earlier, calculate the net daily advantage of the system. (Do not round intermediate calculations.)

What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 650 payments a day will be made to lock boxes with an average payment size of $2,000. The bank’s charge for operating the lock boxes is $.40 a check. The interest rate is .012% per day.

Explanation / Answer

a-1) The lock box reduces cost by :

650 a day * 2000 on a average * 2 days = 2,600,000

Daily interest saved = 2,600,000 * .00012 = $ 312

a-2) The bank charge each day 650 payment * .40 = $ 260

The lock box is worthwhile ,interest savings exceed the bank charges .

b)Break even occur when interest earnings equals the bank fees

.00012 * [650 *2000 * number of days saved ] =$ 360

.00012 * [1,300,000 * number of days saved ] = 360

1,300,000 * number of days saves = 360 /.00012

Number of days saved = 3,000,000 / 1,300,000

                                   = 2.31 days

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