What minimum reduction in the time to collect and process each check is needed to justify use of the lock box system? If 400 payments per day, 2,000 average payment size, Bank charge $.40 per check and interest rate is .015 per day.
The answer depends on the value of time. For example, the answer differs if you process the checks yourself versus if an employee processed the checks for minimum wage.
To determine the minimum reduction in time needed to justify the use of the lock box system, we need to compare the costs of using the lock box system versus the costs of processing the checks manually.
Let's calculate the costs of manually processing the checks first:
1. Calculate the total check processing cost per day:
Since there are 400 payments per day and the bank charges $0.40 per check, the total check processing cost per day is 400 * $0.40 = $160.
2. Calculate the interest earned on the delay in payment:
The average payment size is $2,000, and the interest rate is 0.015 per day. So, the interest earned per day for delaying the payment is $2,000 * 0.015 = $30.
Now, let's determine the minimum reduction in time needed to justify the use of the lock box system:
If the lock box system reduces the check processing time, it would eliminate the need to manually process the checks. Therefore, the lock box system's cost is the bank charge per check.
Let's assume the employee's rate is minimum wage, which is $7.25 per hour. To calculate the hourly wage, divide the daily wage by the number of working hours in a day, which is typically 8 hours. Hence, the hourly wage is $7.25/8 = $0.90625 per hour.
3. Calculate the total cost per day for processing checks manually:
Since an employee processes the checks, the hourly wage for 8 hours would be $0.90625 * 8 = $7.25 per day.
Therefore, the total cost per day for processing checks manually is $7.25.
Now, let's compare the costs:
The lock box system costs $0.40 per check, while the manual processing cost is approximately $7.25 per day.
To justify the use of the lock box system, the reduction in time needs to be such that it would result in a cost lower than the manual processing cost of $7.25 per day.
Divide the cost of the lock box system by the manual processing cost per day:
$0.40 / $7.25 = 0.055
Therefore, the time to collect and process each check using the lock box system needs to be reduced by at least 5.5% to justify its use compared to manual processing.
Keep in mind that this calculation assumes an employee's wage is minimum wage and that no other costs or benefits are considered. Consult with an accountant or financial advisor to perform a more detailed analysis based on your specific circumstances.