Question

Katniss Everdeen is the credit and loans manager for Panem Corp and has given you the following information to help her decide if Panem should use a lockbox system or not. Current payments forecasted: 600 payments per day Average Payment size: $1,200 The bank’s charge for the lockbox: $0.19 per cheque Currently, the Panem receives these cheques directly and then deposits them into the bank themselves. Customers are happy with this setup and usually pay within the discount period. Based on this, Katniss believes that there will be a 1% decrease in payments sent to the lockbox, with customers taking the option to send their payments directly to Panem Corp instead. Katniss doesn’t believe that this will be a problem. Required: Should Panem Corp use a lockbox?

Show all calculations to support your answer.

Answer 1

Current system:

Currently Panem Corp receives the cheques directlly and then deposits them into the bank themselves.

Number of payments per day = 600

Average Payent size = $1,200

Thus, total payments received in a day under current system = 600*$1,200 = $720,000

Proposed Lock-box system

Number of payments per day = 600

Decrease in payments sent to lockbox = 1%

Thus, net number of payments per day = 600 * (100%-1%) = 600*99% = 594

Average Payent size = $1,200

Thus, total payments to be received in a day under lockbox system = 594*$1,200 = $712,800

Bank charges $0.19 per cheque. Total bank charges = Number of payments per day * $0.19 = 594*$0.19 = $112.86

Hence, net payments to be received in a day under lockbox system = $712,800 - $112.86 = $712,687.14

Recommendation

Since the total payments received under the current system is higher by $7,312.86 ($720,000-$712,687.14), Panem Corp should not use lock-box.

However, there are some information not provided in the question for the current system like the cost of depositing cheques into bank and other administrative charges, etc. These costs, if any incurred for the current system, should also be considered before making the decision as above.