Lock boxes Anne teak, The finanicial manager of the furniture manufactures, is considering operating a lock box system. she forcasts that 400 payments a day will be made to lock boxes with an average payment size of $2000. The bank charge for operating the lock boxes is $.40 a check. The interest rate is 0.15 percent per day.
A) If the lock box saves 2 days in collection float, is it worthwhile to adopt the system?
b) What minimum reduction in the time to collect and process each check is needed to justify use of the lock box system?
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No worries! I can still help you understand how to approach these questions, even if I am not an accounting expert. Let's break down the questions step by step:
A) To determine whether it is worthwhile to adopt the lock box system, you need to compare the cost savings from the lock box system to the cost of operating the lock boxes.
1. First, calculate the collection float without the lock box system:
Collection Float = Number of Payments per Day * Average Payment Size * Time to Collect Funds
In this case, the number of payments per day is 400, and the average payment size is $2000. The time to collect funds without the lock box system is the average collection float, which we do not have.
2. Next, calculate the collection float with the lock box system:
Collection Float with Lock Box System = Number of Payments per Day * Average Payment Size * (Time to Collect Funds - Time Saved by Lock Box)
In this case, the time saved by the lock box system is 2 days.
3. Calculate the cost savings from the lock box system:
Cost Savings = Collection Float - Collection Float with Lock Box System
4. Compare the cost savings to the cost of operating the lock boxes:
If the cost savings are greater than the cost of operating the lock boxes (bank charge of $0.40 per check), then adopting the system would be worthwhile.
B) To determine the minimum reduction in the time to collect and process each check needed to justify the lock box system, you need to establish a breakeven point.
1. Calculate the cost of operating the lock boxes:
Cost of Operating Lock Boxes = Number of Payments per Day * Bank Charge per Check
2. Calculate the cost of processing each check:
Cost of Processing Each Check = (Time to Collect Funds * Interest Rate) + (Time to Process Each Check * Daily Labor Cost)
3. Set up an equation to find the minimum reduction:
Cost of Operating Lock Boxes = Cost of Processing Each Check
4. Solve the equation to find the minimum reduction in time needed.
Please note that these calculations are based on the information provided and assumptions made. It is always best to consult with an accounting or finance expert to get an accurate analysis for your specific situation.