Reference no: EM131488933

Question: (Lockbox system) 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 $4.8 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? Use a 365-day year.

b. What would the net savings be from use of the proposed cash acceleration technique? Should Penn adopt the system?