Walt Tech Corporation is a franchiser of automatic car washes in the southeast. The has 4,240 franchisees that operate 7 days per week. The average gross revenue for each location is P500 per day. The company collects 25% of the gross revenues as its franchise fee. Each franchisee mails a check each day to the company headquarters in Makati. The check is supposed to be mailed by noon each day. Many of the franchisees are lax, however payments are forwarded an average of 2 days late. Once mailed, the checks take an average of 1 ½ days in the mail and another 3 days to be processed in the company’s receivables department. Management is considering a change in the company’s cash collection method and is considering two proposals, denoted (a) and (b). The company has a 15% before tax opportunity. (a) Use local messenger services to collect and mail checks. This will save 2 days of late check forwarding. The messenger service costs P20,000 per year.________ (b) Combine messenger service with a lock-box management for a combined savings of 5 days. Costs of this proposal are P230,000 per year for messenger service plus P15,000 that must be left on deposit as a compensating balance required by bank servicing the lock-box. Compute the annual change in the company’s before-tax income that will result from each of the two proposals

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 13P

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Walt Tech Corporation is a franchiser of automatic car washes in the southeast. The has 4,240 franchisees that operate 7 days per week. The average gross revenue for each location is P500 per day. The company collects 25% of the gross revenues as its franchise fee. Each franchisee mails a check each day to the company headquarters in Makati. The check is supposed to be mailed by noon each day. Many of the franchisees are lax, however payments are forwarded an average of 2 days late. Once mailed, the checks take an average of 1 ½ days in the mail and another 3 days to be processed in the company’s receivables department. Management is considering a change in the company’s cash collection method and is considering two proposals, denoted (a) and (b). The company has a 15% before tax opportunity. (a) Use local messenger services to collect and mail checks. This will save 2 days of late check forwarding. The messenger service costs P20,000 per year.______________________________ (b) Combine messenger service with a lock-box management for a combined savings of 5 days. Costs of this proposal are P230,000 per year for messenger service plus P15,000 that must be left on deposit as a compensating balance required by bank servicing the lock-box.______________________ Compute the annual change in the company’s before-tax income that will result from each of the two proposals

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