Reference no: EM132597829

Shams Building supplies company has annual sales of Rs36 million (all on credit). Shams's, collection manager, has estimated that it takes 8 days for a mailed payment to be credited to Shams's account and this time can be cut to 5 days if Shams opens up a lock box account with a local bank. The account in which the checks are placed earns 12% p.a The lockbox agreement calls for a monthly payment of Rs1,000 and in addition, a monthly charge of Rs0.1 per cheque. Shams currently processes 60,000 cheques monthly.

Required:

a) What are Shams's daily sales?( Assume 360 days in a year)

b) How much money is tied up in this interval of time?

c) By how much will Shams's average bank balance increase if it adopts the lockbox?

d) Should Shams's adopt the lockbox system?

e) Suppose that Shams's has found that a regular 40% if its customers account for 80% of credit sales. Should Sham's open up the lockbox and use it only for this 40% of the customers?