Munyu Ltd. currently has a centralized billing system. All payments are made by customers to a central billing location. It requires an average of eight days for customers mailed payments to reach the central location. An additional three days are required to process payments before a deposit can be made into the bank account. The firm has a daily average collection of sh. 10,000,000. Recently the bank has investigated the possibility of initiating a lockbox system. It is estimated that if the system is introduced customers mail payments will reach the receipt location five days sooner than is the case now. Furthermore, the processing time of the payments could be reduced to one day.
Required:
(i) The reduction in cash balances in transit to the bank brought about by the lockbox system. (3 marks).
(ii) The opportunity cost of the present system assuming a 5 per cent per annum return on deposits at the bank. (2 marks)
(iii) In light of your answer to part (ii) above, should the lockbox system
be introduced, if it will cost Shs. 4,000,000?
(4 marks)

Answer rating: 100% (QA)

The detailed answer for the above question is provided below i The reduction in cash balances in tra... View the full answer