Century Corporation uses a continuous billing system that results in average dialy receipts of $600,000. The company treasurer estimates that a proposed lock-box system could reduce its collection time by 2 days.
a. How much cash would the lock-box system free up for the company?
b. What is the maximum amount that Century Corp. would be willing to pay for the lock-box system?
c. If the lock-box system could be arranged at an annual cost of $40,000, what would the net gain from instituting the lock-box system be?
To answer these questions, we need to follow these steps:
Step 1: Calculate the average daily collection amount.
Step 2: Calculate the reduction in collection time.
Step 3: Calculate the amount of cash freed up by the lock-box system.
Step 4: Calculate the maximum amount Century Corp. would be willing to pay for the lock-box system.
Step 5: Calculate the net gain from instituting the lock-box system.
Now let's proceed step by step:
Step 1: Calculate the average daily collection amount.
Given: Average daily receipts = $600,000
Step 2: Calculate the reduction in collection time.
Given: The proposed lock-box system could reduce collection time by 2 days.
Step 3: Calculate the amount of cash freed up by the lock-box system.
Amount of cash freed up = Average daily receipts * Reduction in collection time
Amount of cash freed up = $600,000 * 2
Step 4: Calculate the maximum amount Century Corp. would be willing to pay for the lock-box system.
To calculate the maximum amount Century Corp. would be willing to pay for the lock-box system, we need to consider the net gain it would generate.
Therefore, the maximum amount Century Corp. would be willing to pay for the lock-box system would be equal to the net gain it would generate.
Step 5: Calculate the net gain from instituting the lock-box system.
Given: Annual cost of the lock-box system = $40,000
To calculate the net gain, we need to consider the reduction in collection time and the annual cost of the lock-box system.
Net gain = Amount of cash freed up - Annual cost of the lock-box system
Now, we can calculate the values:
a. How much cash would the lock-box system free up for the company?
Cash freed up = $600,000 * 2
b. What is the maximum amount that Century Corp. would be willing to pay for the lock-box system?
Maximum amount to pay = Net gain = Cash freed up - Annual cost of the lock-box system
c. If the lock-box system could be arranged at an annual cost of $40,000, what would the net gain from instituting the lock-box system be?
Net gain = Cash freed up - Annual cost of the lock-box system
By following these steps, we can find the answers to the questions.