Koehl and Daughters Inc. operates a mail-order from doing business on the West Coast. Koehl receives an average of $325,000 in payments per day. On average it takes 4 days from the time customers mail checks until Koehl receives and processes them. Koehl is considering the use of a lockbox system to reduce collection and processing float. The system will cost $6.500 per month and will consist of 10 local depository banks and a concentration bank located in San Francisco. Under this system, customers’ checks should be received at the lockbox locations 1 day after they are mailed, and daily totals will be transferred to San Francisco using wire transfers costing $9.75 each. Assume that Koehl has an opportunity cost of 10 percent and that there are 52 x 5 = 260 working days, hence 260 transfers from cash lockbox location, in a year.
a. What is the total annual cost of operating the lockbox system?
b. What is the annual benefit of the lockbox system to Koehl?
c. Should Koehl initiate the system?