New-Markups Department Store has annual credit sales of $ 300 million. John Harris, the collection manager, has estimated that it takes 10 days for a mailed payment to be credited to Newman’s account and that this time can be cut to 5 days if Newman opens up a lockbox account with a local bank. The account in which the checks are placed earns 8.4% annually. The lockbox agreement calls for a monthly payment of $1,350 and, in addition, a monthly charge of $0.06 per check. Newman’s currently processes 120,000 checks monthly. (Treat these expenses as if they occur at the beginning of the year.)

a) What are Newman’s daily sales (assuming a 360-day year)

b) By how much will Newman’s average bank balance increase if it adopts the lockbox?

c) Should Mr Harris adopt the lockbox ?

d) Suppose Newman’s has found a regular 20% of its customers account for 80% of credit sales. Should Mr Harris open up the lockbox and use it only for this 20% of the customers?

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