QUESTION 2 10 marks

Your finance group has been holding meetings to address the forecast decrease in revenues. The action plans include your lender's proposal to manage cash collections through the use of a bank lockbox for all accounts receivable. The reasoning is cash will be deposited directly to the Companys account and therefore reduce interest costs on outstanding accounts receivable. Your President has asked you to analyze the overall strategy including the use of the lockbox and determine if the benefits outweigh the costs. Key information is provided below:

Use 360 Days in a year for simplicity purposes.

Historical Revenues - $45,000,000

Forecast Total Revenues - revised customer base - $48,000,000

Next year credit terms - all sales - from current of 30 days to 75 days

Revised forecast collection days - all sales - from current of 30 days to forecast 60 days

Historical gross profit percentage earned 36% - all revenues

Forecast gross profit - improved product offering - 35% all revenues

Historical bad debt percentage - 4.25% on all historical revenues

Expected bad debt percentage to decrease to 4.0% on revised total forecast revenue

Cost of capital - 14%

Bank lockbox fee - $1,000 per month

Additional administrative savings - per month - $2,100

No change in inventory levels expected from this effort

No change in trade payables expected from this effort

1. Prepare a schedule which summarizes the benefits versus costs of this plan and write a conclusion as to whether or not this plan is financially acceptable. Show all calculations.