Chapter 17 Cash, Receivables, and Inventory Management

71) Flashbinder Guitars, Inc. is considering a lockbox system that will increase its check processing cost by $.20 per check. The company estimates an average check size of $900 and expects any funds freed up by the new lockbox system can be invested in an account that earns 4% per year before taxes. What reduction in collection time is necessary for the lockbox to be beneficial to Flashbinder Guitars Inc.?

A) 1.96 days

B) 2.03 days

C) 1.73 days

D) 2.15 days

72) Transit float is caused by

A) the time necessary for a deposited check to clear the banking system and become usable funds to the company.

B) the time funds are not available, through the company's bank account, until its payment check has cleared the banking system.

C) the elapsed time from the moment a customer mails his remittance check until the firm begins to process it.

D) the time required for the firm to process remittance checks.

73) Assume that liquid funds can be invested to yield 4.5 percent. If annual remittance checks total $2 billion, what is it worth for the firm to reduce float by 1 day?

A) $388,349

B) $246,575

C) $257,534

D) $24,658

74) Payable through drafts

A) provides for effective control over field payments.

B) are not legal instruments.

C) cannot be cleared through the banking system.

D) are a form of commercial paper.

75) A lock-box system reduces

A) mail float.

B) transit float.

C) disbursing float.

D) A and B

76) A company trying to optimize the use of float will try to

A) increase its disbursing float.

B) decrease its disbursing float.

C) decrease processing float.

D) Both A and C.

77) The time necessary for a deposited check to clear through the commercial banking system causes which of the following types of floats?

A) mail

B) processing

C) transit

D) disbursing

78) SteelCo Production, Inc. is considering the use of a lock-box collection system. SteelCo's average check receipt is $1,350. The company invests excess cash in money market certificates and receives an average of 3.5% annual interest. The lock-box system will speed up SteelCo's collections by 2.5 days. What is the maximum per check processing cost that SteelCo should be willing to pay for the lock-box system?

A) $0.1871

B) $0.2987

C) $0.3236

D) $0.4519

79) The PMI, Inc. processes an estimated 200,000 checks per year from its customers. Total revenue collected by check is $40,000,000. The average float time until the funds are credited to PMI's checking account is 6 days. For an extra cost of $ .06/check, PMI's bank will install a lock-box system that will reduce float time from 6 days to 2.5 days. If PMI earns 3.5% on its checking account, how much per check will PMI make if it uses the lock-box system?

A) $.005

B) $.006

C) $.007

D) $.008

80) The Siskiyou Manufacturing Company will collect an estimated $12,000,000 next year; and it will receive an estimated 20,000 checks. Siskiyou's bank has offered to set up a lock-box system that will reduce float time by 4.5 days. The cost of the system will be $ .15 per check. What is the minimum annual interest rate on its cash balance that Siskiyou should receive before it would be willing to adopt the lock-box system?

A) 3.25%

B) 2.03%

C) 1.82%

D) 1.07%