A firm has arranged for a lockbox system to reduce collection time of

A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days.

The lockbox system will reduce the average collection period by 3 days by reducing processing, mail, and clearing float. The firm has total annual outlays of $15,000,000 and currently pays 9 percent for its financing.(Assume a 360-day year.)
(a) Calculate the cash conversion cycle before and after the lockbox system.
(b) Calculate the savings in financing costs from the lockbox system.

ANSWER

(a) CCC before lockbox = 43 + 50 – 10 = 83 days
CCC after lockbox = 40 + 50 – 10 = 80 days
(b) $15,000,000 / 360 = $41,666.67 per day × 3 × 0.09 = $11,250