Reference no: EM1321215
Question; Drugs ‘R US operates a mail order pharmaceutical business in San Francisco. The firm receives an average of $325,000 in payments per day. On average, it takes four days from the time customers mail their checks until the firm receives them. The company is considering establishing a lockbox system, in which customers’ payments would be sent to nearby banks (local in terms of the purchasers) instead of directly to San Francisco. Banks in the lockbox locations would then wire the daily receipts to a single (concentration) bank.
The lockbox system, which would consist of ten local depository banks and a concentration bank, would cost Drugs ‘R US $6,500 per month. Under this system, customers’ checks would be received at the lockbox locations one day after they are mailed, and the daily total would be wired to the concentration bank at a cost of $9.75 each.
Assume the firm could earn 10 percent on short term investments; further assume 260 working days, and hence 260 transfers from each lockbox location per year.
a. What is the total annual cost of operating the lockbox system?
b. What is the dollar benefit of the system to Drugs ‘R US?
c. Should the firm initiate the lockbox system?
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