A firm is evaluating whether to establish a lockbox system.
The bank will charge $30,000 per year for the lockbox and the
firm will save approximate... Accounting MCQs | Accounting MCQs

A firm is evaluating whether to establish a lockbox system.
The bank will charge $30,000 per year for the lockbox and the
firm will save approximately $8,000 in internal processing costs.
The firm estimates that the float will be reduced by three days if
the lockbox system is put into place. Assuming that average daily
cash receipts are $350,000 and short-term interest rates are 4%,
what decision should the firm make regarding the lockbox system?

Do not establish the lockbox system because the net
cost is $30,000.
Do not establish the lockbox system because the net
cost is $22,000.
Establish the lockbox system because the net benefit is
$12,000.
Establish the lockbox system because the net benefit is
$20,000.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

(d) The requirement is to calculate the financial
cost/benefit of establishing a lockbox system. Answer (d) is
correct because the solution is found by comparing the cost in
fees to the benefits in terms of reduced interest costs. Since the
float is reduced by three days the firm gets the use of $1,050,000
($350,000 × 3 days) in additional funds that results in interest
savings of $42,000 ($1,050,000 × 4%). Therefore, the net benefit
is equal to $20,000 ($42,000 – $22,000). Answer (a) is incorrect
because it only considers the bank fee. Answer (b) is incorrect
because it only considers the net change in processing costs.