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 2.0 days and the processing by half a day. The remittances average $62,000 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 10 percent. What will the firm’s savings be from using the lockbox?

Answer 1

Average daily sales = $62,000

No, Business days = 270 days

Average check amount = $ 500

Opportunity cost of fund = 10%

collection time saved = 2.0 days

No of check processed per day = $62000 / $500 = 124

Pre checkprocessing fee = 0.34

Processing time saved = 0.5 day

Cost of lock box = No of check processed per day * Pre checkprocessing fee * No, Business days

= 124 * 0.34 * 270

= $11,383.2

savings from mail float = collection time saved * Average daily sales

= 2.0 * 62,000

= $1,24,000

savings from processing float = Processing time saved * Average daily sales

= 0.5 * 62,000

=$ 31,000

Total savings = savings from mail float + savings from processing float

= $1,24,000 +  $ 31,000

= $1,55,000

Savings from limit box = Total savings * Opportunity cost of fund

= $1,55,000 * .10

= $15,500