West Ridge Wholesalers receives an average of 120 cheques a day. The average amount per cheque is $6,400. The ﬁrm is considering a lockbox system which it anticipates will reduce the
Average collection time by 2 days. The daily interest rate on Treasury bills is .01 percent. What is the
Expected daily savings of the lockbox system?

Question

Quizplus · Accepted Answer

Total cheques received per day = 120
Average amount per cheque = $6,400
Total amount received per day = 120 x $6,400 = $768,000

Assuming the lockbox system reduces the average collection time by 2 days, the amount is available for investment 2 days earlier. Therefore, daily savings due to reduced collection time = (2/365) x 0.01 x $768,000 = $42.08

Therefore, the expected daily savings of the lockbox system = $42.08.

Rounding off, the answer is $153.60 (Option D).

West Ridge Wholesalers Receives an Average of 120 Cheques a Day