Chapter 15 Assignment Slide #1: Key Attributes of SSPI's Current Collection System (Eastern Region, Last Year's Data) 1. Our eastern region customers, stores that sell our colored sugar chips and granulated and powered products, remit 5,500 checks per month to our office in Wichita: 2. Annual collections for the region were $45,625,000 3. The average delay due to float was 15 days (8 days mall float, 4 days processing feat, and 3 days dearing float). 4. Our Wichita bank currently charges $24,000 per year in service charges and fees of $0.25 per payment to process these payments. 5. SSPI maintains a marketable securities portfolio that earns an average return of 4% CFO: Okay, let's stop here for a second. Thave a question. How much does our current system cost us? MICHAEL Ma'am, you're getting ahead of me a little; that information is detailed on slide 2. Let me show you Slide #2: Costs of SSPI's Current Collection System (Eastern Region, Last Year's Data) Annual service charges $24,000 Annual per-payment processing fees Cost of the current system CFOI Good. What's next? MICHAELI In contrast to the existing system, our Wichita bank has offered to create a lockbox system that would involve customers sending their payments directly to in their region. The banks will process the deposits and then wire the funds to our bank in Wichita. The specifics of the proposat are detailed inside a Slide #3: Costs of SSPI's Proposed Lockbox System 1. The average delay due to float will be reduced to 3 days (2 days mail float: no processing float: 1 day dearing tioat, including the wire transfer delay 2. The bank will eliminate its current service charges and fees but will impose a compensating balance of $40,000 on our Wichita account. Similar balances will not be required in the other six banks 3. Funds released by the lockbox system will be invested in marketable securities and will earn an average return of 4% CFO: SO, should we switch from our current collection system to the lockbox system? . centralized decentralized MICHAEL: Yes, I think we should. The bene system is that it saves us of noat. Wait let me show you slide 4 MICHAEL: Yes, I think we should. The benefit to the lockbox system is that it saves us of float. Wait, let me show you slide 4. 15 days 12 days Slide #4: Evaluation of SSPI's Proposed Lockbox System Average collections - $125,000 Released funds 6 days Income earned from the released funds Cost of lockbox system Net earnings on the lockbox system Het value of the lockbox system over the current system - CFO: So, now I have three questions. First, based on these values, how does the Finance Committee know whether to recommend accepting the lockbox proposal? That is, how should we interpret these values? Second, should we give up our current system and switch to the lockbox system? And finally, are there any other methods that SSPI could use instead of a lockbox system to return customer funds to the Wichita bank account? MICHAEL: First, the general rule that determines whether to implement the lockbox system is this: If the net benefits are then accept the proposal Therefore, based on this criterion to the lockbox system. And last, as far as alternative methods are concerned, several choices are available, including MICHAEL: First, the general rule that determines whether to implement the lockbox system is this: If the net benefits are then accept the proposal. Therefore, based on this criterion, to the lockbox system, And fast, as far as alternative methods are concerned, several choices are available, including ... CFO: Overall, Michael, you've done a very good job! Now, take it easy this evening and get some rest so that you're ready for tomorrow's presentation. I'll see you about an hour before the meeting. MICHAEL: First, the general rule that determines whether to implement the lockbox system is this: If the net benefits are then accept the proposal Therefore, based on this criterion to the lockbox system. And last, as far as alternative met Yes, we should switch choices are available, including no, we should not switch CFO: Overall, Michael, you've done a very good job! Now, take it easy this evening and get some rest so that you're ready for tomorrow's presentation. I'W see you about an hour before the meeting MICHAELS First, the general rule that determine whether to implement the lockbox system is this if the net benefits are then accept the proposal Therefore, based on this criterion to the lackbox system, And last, as far as alternative methods are concerned several choices are available, including courier who would hand carry checks from customers to the bank wire transfers from customers to the Wichita bank CFO evening and get some rest so that you're ready for tomorrow preauthorized checks drawn on customers accounts Chapter 15 Assignment Slide #1: Key Attributes of SSPI's Current Collection System (Eastern Region, Last Year's Data) 1. Our eastern region customers, stores that sell our colored sugar chips and granulated and powered products, remit 5,500 checks per month to our office in Wichita: 2. Annual collections for the region were $45,625,000 3. The average delay due to float was 15 days (8 days mall float, 4 days processing feat, and 3 days dearing float). 4. Our Wichita bank currently charges $24,000 per year in service charges and fees of $0.25 per payment to process these payments. 5. SSPI maintains a marketable securities portfolio that earns an average return of 4% CFO: Okay, let's stop here for a second. Thave a question. How much does our current system cost us? MICHAEL Ma'am, you're getting ahead of me a little; that information is detailed on slide 2. Let me show you Slide #2: Costs of SSPI's Current Collection System (Eastern Region, Last Year's Data) Annual service charges $24,000 Annual per-payment processing fees Cost of the current system CFOI Good. What's next? MICHAELI In contrast to the existing system, our Wichita bank has offered to create a lockbox system that would involve customers sending their payments directly to in their region. The banks will process the deposits and then wire the funds to our bank in Wichita. The specifics of the proposat are detailed inside a Slide #3: Costs of SSPI's Proposed Lockbox System 1. The average delay due to float will be reduced to 3 days (2 days mail float: no processing float: 1 day dearing tioat, including the wire transfer delay 2. The bank will eliminate its current service charges and fees but will impose a compensating balance of $40,000 on our Wichita account. Similar balances will not be required in the other six banks 3. Funds released by the lockbox system will be invested in marketable securities and will earn an average return of 4% CFO: SO, should we switch from our current collection system to the lockbox system? . centralized decentralized MICHAEL: Yes, I think we should. The bene system is that it saves us of noat. Wait let me show you slide 4 MICHAEL: Yes, I think we should. The benefit to the lockbox system is that it saves us of float. Wait, let me show you slide 4. 15 days 12 days Slide #4: Evaluation of SSPI's Proposed Lockbox System Average collections - $125,000 Released funds 6 days Income earned from the released funds Cost of lockbox system Net earnings on the lockbox system Het value of the lockbox system over the current system - CFO: So, now I have three questions. First, based on these values, how does the Finance Committee know whether to recommend accepting the lockbox proposal? That is, how should we interpret these values? Second, should we give up our current system and switch to the lockbox system? And finally, are there any other methods that SSPI could use instead of a lockbox system to return customer funds to the Wichita bank account? MICHAEL: First, the general rule that determines whether to implement the lockbox system is this: If the net benefits are then accept the proposal Therefore, based on this criterion to the lockbox system. And last, as far as alternative methods are concerned, several choices are available, including MICHAEL: First, the general rule that determines whether to implement the lockbox system is this: If the net benefits are then accept the proposal. Therefore, based on this criterion, to the lockbox system, And fast, as far as alternative methods are concerned, several choices are available, including ... CFO: Overall, Michael, you've done a very good job! Now, take it easy this evening and get some rest so that you're ready for tomorrow's presentation. I'll see you about an hour before the meeting. MICHAEL: First, the general rule that determines whether to implement the lockbox system is this: If the net benefits are then accept the proposal Therefore, based on this criterion to the lockbox system. And last, as far as alternative met Yes, we should switch choices are available, including no, we should not switch CFO: Overall, Michael, you've done a very good job! Now, take it easy this evening and get some rest so that you're ready for tomorrow's presentation. I'W see you about an hour before the meeting MICHAELS First, the general rule that determine whether to implement the lockbox system is this if the net benefits are then accept the proposal Therefore, based on this criterion to the lackbox system, And last, as far as alternative methods are concerned several choices are available, including courier who would hand carry checks from customers to the bank wire transfers from customers to the Wichita bank CFO evening and get some rest so that you're ready for tomorrow preauthorized checks drawn on customers accounts