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 600 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 $0.30 a check. The interest rate is 0.011% per day.

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

b. Is it worthwhile to adopt the system?

Yes

No

c. 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.)

Reference links

Explanation / Answer

a. Reduction in collection float = Number of payments per day × Average payment amount × Reduction in collection float days

= 600 × $2,000 × 2

= $2,400,000

Daily interest earnings = Reduction in collection float × Daily interest rate

= $2,400,000 × .00011

= $264

Daily cost = Number of payments per day × Cost per payment

= 600 × $.30

= $180

Net daily advantage = Daily interest earnings – Daily cost

= $264 – 180

= $84

b. Since the net daily advantage is positive, it is worthwhile to adopt the system.

c. The break-even reduction number of days occurs when the net daily advantage of the system is zero.

Net daily advantage = 0 = Daily interest earnings – Daily cost

= [.00011 × (600 × $2,000 × Days)] – (600 × $.30)

Days = 1.36

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.