Lockbox analysis

Walking down the hallway to the executive conference room, Abigail Holmes, the chief financial officer of Galaxy Aircraft Co$.,$ is talking with Ryan

Singh, her administrative assistant and prot$$g$.$

Read their dialogue and correctly fill in the missing information.

CFO: I$\text{'}$m a little anxious about your presentation to the Finance Committee on Thursday, so I$\text{'}$d like you to run through your comments and

presentation slides with me$.$ Because three board members, including the chair and the president, will be attending, I want you to make a

very favorable impression. It could mean a great deal to your career with Galaxy. An upgrade in our receivables collection system could have

a significant effect on both Galaxy's

relationship and income stream.

RYAN: Yes, I have my notes and the flash drive with my presentation right here. Let me get things organized and I'll begin.

After a slight delay, Ryan begins his presentation:

Good morning. I would like to present to you the findings of our recent evaluation of the system currently used to collect receivables

payments from our customers east of the Mississippi River. With our corporate headquarters in Oklahoma City, Oklahoma, we currently have

broken down the country into two regions: the portion east of the Mississippi River and the portion west of the river. We have also conducted

an evaluation of a proposed lockbox system that would break down our customer base into six geographic subregions, with each being

served by a lockbox collection center. These collection centers would then transfer the funds to our main concentration account here in

Oklahoma City.

Slide # $1$: Key Attributes of Galaxy's Current Collection System $($Eastern Region, Last Year's Data$)$

Our eastern region customers, stores that sell our one$-$ and two$-$person glider planes, remit $7,700$ checks per month to our office in

Oklahoma City.

Annual collections for the region were $$63,875,000.$

The average delay due to float was $15$ days $(8$ days mail float, $4$ days processing float, and $3$ days clearing float$).$

Our Oklahoma City bank currently charges $$24,000$ per year in service charges and fees of $$0\mathrm{.}25$ per payment to process these

payments.

Galaxy maintains a marketable securities portfolio that earns an average return of $4.$

Slide # $2$: Costs of Galaxy's Current Collection System $($Eastern Region, Last Year's Data$)$

Annual service charges $=$$$24,000$

Annual per$-$payment processing fees $=$

Cost of the current system $=$

CFO: Good. What's next?

RYAN: In contrast to the existing system, our Oklahoma City bank has offered to create a lockbox system that would involve customers sending

their payments directly to

in their region. The banks will process the deposits and then wire the funds to

our bank in Oklahoma City. The specifics of the proposal are detailed in slide $3.$

Slide #$3$: Costs of Galaxy's Proposed Lockbox System

The average delay due to float will be reduced to $3$ days $(2$ days mail float; no processing float; $1$ day clearing float, including the

wire transfer delay$).$

The bank will eliminate its current service charges and fees but will impose a compensating balance of $$35,000$ on our Oklahoma

City account. Similar balances will not be required in the other six banks.

Funds released by the lockbox system will be invested in marketable securities and will earn an average return of $4.$