Question

12. A firm uses a continuous billing system that results into an average daily receipt of TZS 4,000,000. It is contemplating the institution of concentration banking instead of the current system of centralized billing and collection. It is estimated that such a system would reduce collection period of accounts receivables by two days. Concentration banking would cost TZS 75,000 annually and 8 per cent can be earned by firm on its investments. It is also found that a lock-box system could reduce its overall collection time by four days and could cost annually TZS 120,000.

a. How much cash would be released with the concentration banking system?

b. How much cash can be saved due to reduction in collection period by two days? c. Should the firm institute concentration banking?

d. How much cash would be freed by lock box- system?

e. Between concentration banking and lock box system, which is better?

Answer 1

a.cash would be released with the concentration banking system = 4,000,000 x 2 =8,000,000

b. cash can be saved due to reduction in collection period by two days = 8% x 8,000,000

=640,000

c.Yes the firm should institute concentration banking as it will cost only 75,000 for a saving of 640,000

d.cash would be freed by lock box- system = 4,000,000 x 4 =16,000,000

e.Saving in lockbox system = 8% x 16,000,000

=1,280,000

lock box system is better because saving is 1,280,000 - 120,000

=1,160,000