Problem:

It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. Cookie Cutter's management is considering a lockbox system to reduce the firm's collection times. It is expected that the lockbox system will reduce receipt and deposit times to three days total. Average daily collections are $133,000, and the required rate of return is 5 percent per year. Assume 365 days per year.

Required:

Question 1: What is the reduction in outstanding cash balances as a result of implementing the lockbox system?

Question 2: What is the daily dollar return that could be earned on these savings?

Question 3: What is the maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the end of the month?

Question 4: What is the maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the beginning of the month?

Note: Show supporting computations in good form.