I. Malitz and Associates Inc. operates a mail-order firm doing business on the West Coast. Malitz receives an average of $325,000 in payments per day. On average, it takes 4 days from the time customers mail checks until Malitz receives and processes them. Malitz is considering the use of a lockbox system to reduce collection and processing float. The system will cost $6,500 per month and will consist of 10 local depository banks and a concentration bank located in San Francisco. Under this system, customers checks should be received at the lockbox locations 1 day after they are mailed, and daily totals will be transferred to San Francisco using wire transfers costing $9.75 each. Assume that Malitz has an opportunity cost of 10 percent and that there are 52 X 5 = 260 working days, hence 260 transfers from each lockbox location, in a year.

a. What is the total annual cost of operating the lockbox system?

b. What is the benefit of the lockbox system to Malitz?

c. Should Malitz initiate the system?