It takes Cookie Cutter Modular Homes, Inc., about five 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 $140,000, and the required rate of return is 10 percent per year.

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

b. What is the dollar return that could be earned on these savings?

c. What is the maximum monthly charge Cookie Cutter should pay for this lockbox system?