Accounting / Lock Boxes?

Question

Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 400 payment a day will be made to lock boxes with an average payment size of $2,000.00. The bank's charge for operating the lock boxs is $.40 a check. The interest is $.015 percent a day/
a. If the lock box saves 2 days in collection float, is it worthwhile to adapt the system
b. What minimum reduction in the time to collect and process each check is need to justify use of the lock-box system?

Answer 1

If the mean check size is $2,000 and earns .00015 per day, a two day reduction in float would be worth, (2000)(.00015) or $.30.

Based on this alone, it's not worthwhile to open the lock box account. However, it also reduced the overhead in processing the checks, so I'd do it anyway.

If there was an average of 2.667 day reduction in float then it would be justified.