What is the total annual cost of operating the lock box system?a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume 360 days per year throughout this problem.)
What is the total annual cost of operating the lock box system?a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume 360 days per year throughout this problem.)
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16. 1
On a typical day, Park Place Clinic writes $1,000 in checks. It generally takes four days for those checks to clear. Each day the clinic typically receive $1,000 in checks that take three days to clear. What is the clinic’s average net float?
16.2
Drugs ‘R Us operates a mail order pharmaceuticsl business on the West Coast. The firm receives an average of $325,000 in payments per day. On average, it takes four days for the firm to receive payment, from the time customers mail their checks to the time the firm receives and processes them. A lockbox system that consists of 10 local sepository banks and a concerntration bank in San Francisco would cost $6,500 per month. Under thsi 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 that the firm could earn 10 percent on marketable securities and that there are 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?
16.4
Langley Clinics, Inc., buys $400,000 in medical supplies each year (at gross prices) from its major supplier, Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is paying the supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day 10, and replacing the trade credit with a bank loan that has a 10 percent annual cost.
a. What is the amount of free trade credit that Langley obtains from Consolidated Services? (Assume 360 days per year throughout this problem.)
b. What is the amount of costly trade credit?
c. What is the approximate annual cost of the costly trade credit?
d. Should Langley replacer its trade credit with the bank loan? explain your answer.
e. If the bank loan is used, how much of the trade credit should be replaced?
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