Question

Simon Electronics is evaluating whether a lockbox it is currently using is worth keeping.
Management acknowledges that the lockbox reduces the mail float by 1.5 days and processing time by half a day. The remittances average $100,000 a day for Simon Electronics, with the average check being $1,000. The bank charges $0.30 per processed check. Assume that there are
270 business days in a year and that it costs Simon 5 percent to finance accounts receivable. Should Simon Electronics keep the lockbox?

Answer 1

Answer : Determination of whether to keep lockbox or not :

Cost of Lockbox = Average check size * Bank Processing charges

=(Total remittances in a day / Average number of daily checks processed)*Bank Processing charges*Number of business days

= (100000 / 1000) * 0.30 * 270

= 8100

Savings due to lockbox = Total remittances in a day * (Mail float + Processing time ) * Interest rate

= 100000 per days * (1.5 day + 0.5 days) * 0.05

= 10000

As savings ($10,000) is more than cost of lockbox ($8100) therefore Simon Enterprises should keep lockbox.