Question
Fine Steel (FS) is a distributor of cold-rolled steel products to the automobile industry. All of its sales are on a credit basis, net 40
Fine Steel (FS) is a distributor of cold-rolled steel products to the automobile industry. All of its sales are on a credit basis, net 40 days. Sales are evenly distributed over its 10 sales regions throughout the United States. Delinquent accounts are not a problem. The company has recently undertaken an analysis aimed at improving its cash management procedures. FS determined that it takes an average of 5.0 days for customers payments to reach the head office in Columbus, OH from the time they are mailed. It takes another full day in processing time prior to depositing the checks with a local bank. Transit float typically averages two days. Annual sales average $20 million for each regional office. Reasonable investment opportunities can be found that yield 10 percent per year. To alleviate the float problem confronting the firm, the use of a lockbox system in each of the 10 regions is being considered. This would reduce mail float by 2.0 days. One-half day in processing float would also be eliminated, plus a full day in transit float. The lockbox arrangement would cost each region $4,000 per month. Additionally, FS will save $200,000 in accounting costs, if the lockbox system is implemented.
Should FS adopt the lockbox system? Show computations.
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