Question

Jennifer Electrical is evaluating whether a lockbox it is currently using is worth keeping. Management estimates that the lockbox reduces the mail float by 1.4 days and the processing by half a day. The remittances average $49,000 a day for Jennifer Electrical, with the average check being for $500. The bank charges $0.34 per processed check. Assume that there are 270 business days in a year and that the firm’s opportunity cost for these funds is 7 percent. What will the firm’s savings be from using the lockbox? (Round answer to 0 decimal places, e.g. 5,275.)

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Answer 1

Solution:

Average daily sales = $49,000

No. of business days = 270

Opportunity cost of funds = 7%

Average check amount = $500

No. of checks processed per day = $49,000 / $500 = 98

Collection time saved = 1.4 days

Processing time saved = 0.5 days

Per-check processing fee = $0.34

The cost of a lockbox = 98 checks * $0.34 per check * 270 days = $8,996

Savings from mail float = 1.4 days * $49,000 = $68,600

Savings from processing float = 0.5 days * $49,000 = $24,500

Total savings = (Savings from mail float + Savings from processing float)

= $68,600 + $24,500 = $93,100

Savings from lockbox = $93,100 * 0.07 = $6,517