Question

As the treasury manager for a sporting goods manufacturer, you are responsible for the firm's cash management, including the cash collection system. Your firm receives an average of 5,000 remittances per month with an average face value of $10,000. The current collection system consists of customers remitting directly to company headquarters. The average mail delay is 3 days. The typical remittance remains at headquarters for 2 days. You are informed that the average deposit is available in 2 days. Assume the opportunity investment rate is 5% and that it costs your firm $0.35 to process each check. Fixed costs are said to be $0. Compute the monthly total cost for your firm's current cash collection system a. $39, 500 b.$49,695 c. $15,000 d.$70,000

Answer 1

Total remittance = Average remittance amount * Number of remittance
= $10,000 * 5,000
= $50,000,000

Total delay in payment = 3 + 2 + 2 = 7 days

Implied interest cost @5% for 7 days = $50,000,000 * 7/365 * 5%
= $47,945

Processing cost at $0.35 per check = 5,000 * 0.35
= $1,750.

Total cost in current scenario = Implied interest cost + Processing cost
= $47,945 + $1,750
= $49,695.