Colburn Inc. is considering a

Colburn Inc. is considering a lock box system. The firm has analyzed its credit receipts and determined the following:

Average time checks are in mail—3 days

Average internal check-processing time—3 days

Average to clear the banking system—2 days

Total credit sales—$180 million

Average check—$10,000

Colburn funds its accounts receivable with short-term debt at 8%. First Bank has indicated that its lock box system will reduce mail float by an average of one day and eliminate internal processing time. The cost of the system is $0.50 for each check processed, plus 0.05% of the gross revenues processed. Should Colburn implement the lock box system? If the charge based on gross revenue remains constant, at what per-check charge would Colburn be indifferent to the lock box arrangement?

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