Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by two days. Based on the following
information, should the lockbox system be adopted?
Average number of payments per day 600
Average value of payment $1,100
Variable lockbox fee (per transaction) $ .35
Annual interest rate on money market securities 6.0%
How would your answer change if there were a fixed charge of $1,000 per year in addition to the variable charge?
Average Daily remittance = 600*1100= $660000
Reduction in collection time=2 days
Float reduction = daily remittance*(Reduction in float in days)= 660000*2=$1320000
So, $1320000 ...
Solution describes the steps to check whether a lockbox sysyem is cost effective in the given scenario.