HSA 525 WEEK 9 HOMEWORK
16.1 – On a typical day, Park Place Clinic writes $1,000 in checks. It generally takes four days for those
checks to clear. Each day the clinic typically receives $1,000 in checks that take three days to clear. What is
the clinics average net float?
16.2 – Drugs ‘R Us operates a mail order pharmaceutical business on the West Coast. The firm receives an
average of $325,000 in payments per day. On average, it takes four days for the firm to receive payment,
from the time customers mail their checks to the time the firm receives and processes them. A lockbox
system that consists of 10 local depository banks and a concentration bank in San Francisco would cost
$6,500 per month. Under this system, customers’ checks would be received at the lockbox locations one
day after they are mailed, and the daily total would be wired to the concentration bank at a cost of $9.75
each. Assume that the firm could earn 10 percent on marketable securities and that there are 260 working
days and hence 260 transfers from each of the ten lockbox locations per year.
(a) What is the total annual cost of operating the lockbox system?
(b) What is the dollar benefit of the system to Drugs ‘R Us?
(c) Should the firm initiate the lockbox system?
16.4 – Langley Clinics, Inc., buys $400,000 in medical supplies each year (at gross prices) from its major
suppliers, Consolidated Services, which offers Langley terms of 2.5/10, net 45. Currently, Langley is
paying the supplier the full amount due on Day 45, but it is considering taking the discount, paying on Day
10, and replacing the trade credit with a bank loan that has a 10 percent annual cost.
(a) What is the amount of free trade credit that Langley obtains from Consolidated Services?
(Assume 360 days per year throughout this problem)
(b) What is the amount of costly trade credit?
(c) What is the approximate annual cost of the costly trade credit?
(d) Should Langley replace its trade credit with the bank loan? Explain your answer.
(e) If the bank loan is used, how much of the trade credit should be replaced?
16.5. – Milwaukee surgical supplies, Inc., sells on terms of 3/10, net 30. Gross sales for the year are
$1,200,000, and the collections department estimates that 30 percent of the customers pay on the tenth day
and take discounts, 40 percent pay on the thirtieth day and the remaining 30 percent pay, on average, 40
days after the purchase (Assume 360 days per year.)
(a) What is the firm’s average collection period?
(b) What is the firm’s current receivables balance?
(c) What would be the firm’s new receivables balance if Milwaukee Surgical toughened up on its
collection policy with the result that all nondiscount customers paid on the 30th day?
(d) Suppose that the firm’s cost of carrying receivables was 8 percent annually. How much would
the toughened credit policy save the firm in annual receivables carrying expense? (Assume that
the entire amount of receivables had to be financed.)
17.1 – (a) Modern Medical Devices has a current ratio of 0.5. Which of the following actions would
improve (i.e., Increase) this ratio?
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