Float Analysis: Gifts By Mail Corporation, Inc. Gifts By Mail Corporation, Inc. is a mail-order firm that specializes in unique, one-of-a-kind gift items. The firm is headquartered in Sioux Falls, South Dakota. Matt Thompson, the Cash Manager of Gifts By Mail, has asked you for assistance in analyzing the float that his firm has been experiencing. He is looking for ways in which the firm can be more cost effective, especially due to the increase it has experienced in shipping costs recently. Matt has provided you with the following information about the firms financial and cash situation: Gifts By Mail Corporations Sales totaled $75 million in the fiscal year ended December 31, 2016. The firm is open for business 250 business days per year. Cash receipts are received equally throughout these 250 business days. Each days cash receipts are in the form of 3,000 checks from customers for purchases made on credit. Gifts By Mail Corporations banking relationship is with Citibank. Fees charged by Citibank for handling Gifts By Mails deposits and reporting are as follows: a. $.15 per check received. b. $1.50 per deposit made. c. $1.25 per daily deposit report. Staff hourly costs, including benefits, at the Gifts By Mail Corporations headquarters office are $19.00. Float time, on average, for customer payments received is estimated to be as follows: a. Mail Float the time in the mail from the customer to Gifts By Mail Corporations headquarters office in Sioux Falls, SD: 2 days. b. Holdover Float time spent at the Gifts By Mail Corporations headquarters office opening the letters from customers and preparing the bank deposit: 1 day. c. Availability Float time processing the deposit through the banking system to covert the deposit to good funds that the firm can spend: 2 days. Grand total of Mail Float, Holdover Float, and Availability Float: 5 days. Total staff time at the Gifts By Mail headquarters office spent applying the cash payments received to Accounts Receivable, preparing and making each daily bank deposit, and managing the spendable funds: 7 hours per business day. Gifts By Mail has an 8% annual cost of capital. Based on the above information, please calculate the cost of Gifts By Mail Corporations current cash management situation: 1. Annual cost of float: 2. Annual cost of staff time: 3. Annual cost of bank charges: 4. Grand Total Cost (including float, staff time, and bank charges): Now assume that Gifts By Mail Corporations Board of Directors instructs Matt Thompson, the Cash Manager, to meet with Citibank representatives to explore the possibility of using a lockbox system. The reduction in float time has been mentioned as a key reason to switch to the lockbox method of cash management. After his meeting with the Citibank representatives, Matt provides you with the following information about the possible lockbox system that Gifts By Mail could use: Float time is estimated to drop from the current 5 days to 2.5 days. This savings will occur due to shorter time through the mail system, and the reduction in holdover float within the firm. Staff time at the Gifts By Mail headquarters office used for cash management tasks will drop from its current level of 7 hours per business day to 4 hours per business day. Time will be saved by staff in terms of opening the mail, preparing the deposit, and taking the deposit to the bank. Citibank has provided costs for the lockbox system as follows: a. The lockbox cost will be $65 per month. b. The cost per lockbox item received will be $.25. All customer check payments received would be handled via this lockbox system. Based on these new assumptions using a lockbox system, calculate the cost of Gifts By Mail Corporations proposed lockbox cash management system: 1. Annual cost of float: 2. Annual cost of staff time: 3. Annual cost of bank charges: 4. Grand Total Cost (including float, staff time, and bank charges): Decision Question: Based on your analysis of Gifts By Mail Corporations current cash management situation and the proposed cash management situation using a lockbox, what recommendation would you make to Matt Thompson, the Cash Manager at Gifts By Mail? Should Gifts By Mail switch to the lockbox system? Why or why not?