Penn Steelworks is a distributor of cold-rolled steel products to the automobile industry. All of its sales are on a credit basis, net 30 days. Sales are evenly distributed over its 10 sales regions throughout the United States. Delinquent accounts are no problem. The company has recently undertaken an analysis aimed at improving its cash management procedures. Penn determined that it takes an average of 3.2 days for customers' payments to reach the head office in Pittsburgh from the time they are mailed. It takes another full day in processing time prior to depositing the checks with a local bank. Annual sales average S4.8 million for each regional office. Reasonable investment opportunities can be found that yield 7 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 1.2 days. One day in processing float would also be eliminated, plus a full day in transit float. The lockbox arrangement would cost each region $250 per month. a. What is the opportunity cost to Penn Steelworks of the funds tied up in mailing and processing? b. What would the net cost or savings be from use of the proposed cash acceleration technique? Should Penn adopt the system? DATA Sales regions Mail float Process float Annual sales per region Yield Reduce mail float by Reduce processing foat by Cost each region sys inear 10 1.0 $4,800,000 1.2 S250 SOLUTION a. What is the opportunity cost to Penn Steelworks of the funds tied up in mailing and processing? Annual collection Daily collection Total float Opportunity cost