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As the treasury manager for a sporting goods manufacturer, you are responsible for the firm's cash management activities, including the cash collection system. Your firm
- As the treasury manager for a sporting goods manufacturer, you are responsible for the firm's cash management activities, including the cash collection system. Your firm receives 5,000 remittances per year with an average face value of $10,000. The current collection system consists of customers remitting payments directly to company headquarters. The average mail delay is 3 days. The typical remittance remains at headquarters for 2 days. On average, each deposit is available in 2 days. It costs your firm $0.35 to process each check and fixed costs are approximately $10,000 per year. Your bank is interested in selling you a lockbox system for check collection. Their lockbox system would reduce mail float by 2 days, processing float by 2 days, and availability float by 1 day. The bank charges a variable cost of $0.80 per item and an annual fixed cost of $65,000. Assume that the opportunity investment rate is 7%.
- Should you change to the lockbox system?
- After rejecting your banks original lockbox proposal, assume you began negotiations with your bank to lower the lockbox cost components. That is, you want to determine the amounts for the lockbox cost components that would incentivize you to switch from an internal system to the lockbox system. Specifically, in separate calculations solve for the maximum values for the variable processing cost per check and the annual fixed costs?
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