Question

It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s collection times. It is expected that the lockbox system will reduce receipt and deposit times to three days total. Average daily collections are $120,000, and the required rate of return is 4 percent per year. Assume 365 days per year.

  

a.	What is the reduction in outstanding cash balances as a result of implementing the lockbox system?

  

Cash balance reduction

$

  

b.	What is the daily dollar return that could be earned on these savings? (Round your answer to 2 decimal places. (e.g., 32.16))

  

Dollar return

$

  

c-1	What is the maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the end of the month? (Round your answer to 2 decimal places. (e.g., 32.16))

  

Maximum monthly charge

$

c-2	What is the maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the beginning of the month? (Round your answer to 2 decimal places. (e.g., 32.16))

  

Maximum monthly charge

$

Answer 1

A)ANS

120000*3=360000

B)ANS

360000*4%*1/365=39.45

C)MAXIUM MONTHLY CHARGE=BENIFIT DERIVED FROM LOCK BOX SYSTEM

360000*4%*1/12=1200

D)MAXIUM MONTHLY CHARGE( IF PAYMENT TO MADE AT THE BEG OF THE MONTH)

1200*1/1.00333=1196

MONTHLY INT RATE=4/12=.3333%