If the forecast is 400 payments a day to a lock box with average payment of $2,000 and the bank's charge for operating is $.40 a check and the interest rate is .015 percent a day, what minimum reduction in the time to collect and process each check is needed to justify use of the lock box system?
To determine the minimum reduction in the time to collect and process each check needed to justify the use of the lockbox system, we need to compare the costs of using the lockbox system with the potential savings.
Let's break down the calculation step by step:
1. Calculate the total daily payments received:
Daily payments = Forecasted payments per day x Average payment
Daily payments = 400 payments/day x $2,000/payment
Daily payments = $800,000
2. Calculate the bank's charge for operating:
Bank's charge for operating = Number of checks x Charge per check
Since the forecasted payments are given but not the number of checks, we can assume that each payment represents a check. Therefore, the number of checks is equal to the number of payments.
Bank's charge for operating = 400 checks/day x $0.40/check
Bank's charge for operating = $160/day
3. Calculate the potential interest savings:
Potential interest savings = Daily payments x Interest rate
Potential interest savings = $800,000 x 0.015% (convert percent to decimal)
Potential interest savings = $120
4. Determine the minimum reduction in the time to collect and process each check to justify the lockbox system:
Minimum reduction = Bank's charge for operating - Potential interest savings
Minimum reduction = $160 - $120
Minimum reduction = $40
Therefore, a minimum reduction of $40 in the time to collect and process each check is needed to justify the use of the lockbox system.