Question

Bunsen Company’s cash collections average $10,000 per day. Because Bunsen’s customers are scattered across the country, the average interval between when a customer writes a check and when the check clears and the amount is credited to Bunsen’s account is seven days. Bunsen could reduce this to three days by implementing a lockbox system. With a lockbox system, a company makes arrangements with a bank to retrieve customer checks from a post office box and deposit them directly into the company’s account. Bunsen’s cash payments also average $10,000 per day. Bunsen’s checks are Dr. awn on a bank located in a major metropolitan area, so the check-clearing time is very short—two days. If Bunsen were to use a checking account in a small rural bank, the average check clearing time would increase to five days. 1. How much would Bunsen’s net interest income increase if it were to implement the lockbox system and switch its checking account to a small rural bank? Assume that the interest rate on checking accounts is 6% per annum based on the average daily balance. 2. What if the banking fee for operating the lockbox system were $4,000 per year— should the lockbox system be implemented?

Answer 1

Increase in interest income = average collection/payment per day* no. of days saved* interest rate

1. calculation of interest saved for collection period:

average collection= $10000 per day

no. of days saved= 4 days

interest rate = 10%

interest saved = 10000*4*6/100= $2400

calculation of interest saved for payment period

average payment = $10000 per day

no. of days saved = 3 days

interest rate = 6%

interest saved= 10000*3*6/100 = $1800

Total saving= 2400+1800= $ 4200

2) total saving= $4200

bank fees = $4000

net savings= 4200-4000= $200

yes, the lockbox system should be accepted.