The Happiness Corporation of Boston is considering using a lock-box system for its customers in California. At present, its credit sales to that area amount to about $21,600,000. Establishing a lock box in San Francisco would enable the company to reduce its collection float from 8 to 2 days. The bank in San Francisco will expect the company to maintain a minimum balance of $70,000. The net additional annual cost of adopting the system will be $1,200. Base calculations on a 360-day year.
a. What is the net amount of cash that will be freed for use elsewhere in the business?
b. What is the annual percentage cost of the funds released from the float?
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