Fisher-Gardner Corporation (FGC) began operations 5 years ago as a small firm se
ID: 2795020 • Letter: F
Question
Fisher-Gardner Corporation (FGC) began operations 5 years ago as a small firm serving customers in the Chicago area. However, its reputation and market area grew quickly. Today FGC has customers all over the United States. Despite its broad customer base, FGC has maintained its headquarters in Detroit, and it keeps its central billing system there. On average, it takes 7 days from the time customers mail in payments until FGC can receive, process, and deposit them. FGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 3 days-bringing it down to 4 days. FGC receives an average of $1,600,000 in payments per day.
How much free cash would FGC generate if it implemented the lockbox system? Round your answer to the nearest dollar.
____$
If FGC has an opportunity cost of 10%, how much is the lockbox system worth on an annual basis? Round your answer to the nearest dollar.
____$
What is the maximum monthly charge FGC should pay for the lockbox system? Round your answer to the nearest cent.
____$
Explanation / Answer
(A) Free cash that FGC generate will be = 3 Days Float reduction*$1,600,000 Payment per day
i.e = $4,800,000
(B)The Lock box system worth = $4,800,000*(10%/365)
= $480,000
(C) The maximum monthly charge FGC should pay= Annual savings/12
= $480,000/12
= $40,000
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