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As cash manager for a sporting goods manufacturer, you are responsible for the firm's cash...

Question:

As cash manager for a sporting goods manufacturer, you are responsible for the firm's cash management activities. One of these activities is managing of firm's cash collection system. Your firm receives an average of 5,000 remittances per month with average face value of $10,000.

Your current collection system consists of your customers remitting to your company headquarters. You estimate the average mail delay is 3 days. The typical remittance remains in the headquarters for 2 days. You are informed that an average deposit receives good funds in 2 days.

a. Based on the information above, calculate the monthly total cost of your cash collection system if your firm's opportunity investment rate is 5% and your bank charges $0.35 per item, and a monthly fixed charge of $150.

b. Your bank, interested in selling you a lockbox system, indicates that a lockbox system would reduce mail float by 2 days, processing float by 2 days and availability float by 1 day. If the system charges a variable cost of $0.80 per item and monthly fixed cost of $500, should you change to the lockbox system? Opportunity investment rate remains at 5%.

Lockbox:

A lockbox system is a cash collection system that is operated by a bank on behalf of the company. The idea of the lockbox is to shorten the cash collection cycle.

Answer and Explanation: 1

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a.

Average monthly remittance amount is:

Remittance amount = Remittances * Face value = 5,000 * 10,000 = 50,000,000

Average daily remittance amount...

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Operating Cycle & Cash Cycle: Definition & Calculations

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Chapter 17 / Lesson 2
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The operating cycle and cash conversion cycle are both tools to evaluate the timeline of when a business will become profitable. Explore the calculations of each, and identify their importance to a business.


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