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    Adopting a Lock box system

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    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?

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    Solution Preview


    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 Summary

    Solution describes the steps to check whether a lockbox sysyem is cost effective in the given scenario.