Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 400 payments a day will be made to lock boxes with an average payment size of $2,000. The bank’s charge for operating the lock boxes is $.40 a check. The interest rate is .015 percent per day.
a. If the lock box saves 2 days in collection float, is it worthwhile to adopt the system?
b. What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system?

What do YOU think the answer is?

Not sure but I think it goes something like this?

400 daily payments X $2000 average payment size X 2 days savings = $1,600,000

$1,600,000 X $.0015 interest rate = $2400 daily return

$0.40 expense X 400 checks = $160

$2400 - $160 = $2240

Given the overall daily return there is not a minimum reduction in collection time needed to justify the use of the lock box. The lock box is a winning idea.

Assume that Hickory Company has the following data related to its accounts receivable:

2005 2006

Net sales.. . $1,425,000 $1,650,000
Net receivables:
Beginning of year.. . 375,000 333,500
End of year.. . 420,000 375,000

Use these data to compute accounts receivable turnover ratios and average collection periods for 2005 and 2006. Based on your analysis, is Hickory Company managing its receivables better or worse in 2006 than it did in 2005?