Question

5. Your firm sells to retail customers nationwide. Your bank has just completed a lockbox study of your cash collection system. After a through study of your remittance information, they categorized your customers into 3 groups as shown below. Notice that the consultants expressed remittance data on an average daily basis assuming 30 days in a month. Your opportunity cost of funds is 10%. Using the complete enumeration model, determine which bank offers the lowest cost (hint: 1 bank is optimal) and the customer allocation among the chosen sites. Customer Average monthly Days of float group remittances Number Face value Bank A Bank B Bank C 50,000 $98 2 100,000 1 4 3 75,000 125 3 5 Variable processing $0.55 $0.40 $0.70 costs Fixed costs $350 $500 $250 5 55

Answer 1

We will go through this formula for Bank A, Bank B and Bank C:

$Total float = N[f*d*(i/365)+VC]$ where,

N = Number of remittances

f = Face value

d = days of float

i = Annual opportunity cost

VC = Variable cost

by applying applying above formula, the above equation will be,

Group 1-

Bank A: 5000[$98*5*(10%/365)+$055] = $34,212

Bank B: 5000[$98*6*(10%/365)+$0.40] = $28,055

Bank C: 5000[$98*1*(10%/365)+$0.70] = $36,342

Group 2-

Bank A: 100000[$55*1*(10%/365)+$0.55] = $56,507

Bank B: 100000[$55*4*(10%/365)+$0.40] = $46,027

Bank C: 100000[$55*3*(10%/365)+$0.70] = $74,521

Group 3-

Bank A: 75000[$125*3*(10%/365)+$0.55] = $48,955

Bank B: 75000[$125*5*(10%/365)+$0.40] = $42,842

Bank C: 75000[$125*4*(10%/365)+$0.70] = $62,774

Now, will add Fixed Costs for each bank in each group so,

Bank A: $34,212 + $56,507 + $48,955 + $350 = $140,025

Bank B: $28,055 + $46,027 + $42,842 + $500 = $117,425

Bank C: $36,342 + $74,521 + $62,774 + $250 = $173,887

Therefor, Bank B offers the lowest cost i.e $117,425.

This is the best possible answer as per the knowledge of mine.