Average daily sales for Sierra are $140,000. The financial manager can reduce the float by 4 days using a lockbox system that will cost $33,000. If the opportunity cost of any funds released is 11%, what is the annual savings from this system?

Question

Quizplus · Accepted Answer

To find the annual savings from the lockbox system, we need to calculate the reduction in float first.

Average daily sales = $140,000
Reduction in float = 4 days

Total reduction in float = Average daily sales x Reduction in float 
= $140,000 x 4 
= $560,000

Now we need to calculate the opportunity cost of the funds released. Opportunity cost = Float x Interest rate 
= $560,000 x 11% 
= $61,600

The cost of the lockbox system is irrelevant since the question is asking for savings, not cost. Therefore, the annual savings from this system will be $61,600.

The closest answer option is A, $28,600 which is less than half of the actual savings. Hence, Answer: A.

Average Daily Sales for Sierra Are $140,000