Chapter 27, Problem 8QP

Lockboxes and Collections It takes Cookie Cutter Modular Homes, Inc., about five days to receive and deposit checks from customers. Cookie Culler's management is considering a lockbox system to reduce the firm's collection times. It is expected that the lockbox system will reduce receipt and deposit times to three days total. Average daily collections are $l26, 500, and the required rate of return is 9 percent per year.

1. a. What is the reduction in outstanding cash balance as a result of implementing the lockbox system?
2. b. What is the dollar return that could be earned on these savings?
3. c. What is the maximum monthly charge Cookie Culler should pay for this lockbox system if the payment is due at the end of the month? What if the payment is due at the beginning of the month?