Drugs ‘R US functions a mail order pharmaceutical business in the San Francisco. The firm receives an average of $325,000 in payments per day. On an average, it takes 4 days from the time customers mail their checks till the firm receives them. The company is considering establishing a lockbox system, in which the customer’s payments would be sent to nearest banks (local in terms of purchasers) rather than directly to San Francisco. Banks in lockbox locations would then wire the daily receipts to a single (concentration) bank.
The lockbox system, which would comprises of ten local depository banks and a concentration bank, would cost Drugs ‘R US $6,500 per month. Beneath this system, customer’s checks would be received at 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.
Suppose that the firm could earn 10 percent on short term investments; further suppose those 260 working days and therefore 260 transfers from each lockbox location per year.
Q1. Determine the total annual cost of operating the lockbox system?
Q2. Determine the dollar benefit of the system to Drugs ‘R US?
Q3. Should the firm begin the lockbox system?