Detailed Answer
(c) The requirement is to determine the benefit or loss
from establishing the lockbox system. The firm saves money if
the interest savings is greater than the increased cost of processing
cash receipts. The increased cost of processing cash receipts
is equal to $5,000 ($10,000 bank charge – $5,000 cost
savings). The interest savings is measured by multiplying the
increase in average funds by the short-term interest rate. The
firm will have use of an additional $300,000 ($100,000 × 3 days)
in average funds. Therefore, the interest savings is equal to
$15,000 ($300,000 × 5%), and the overall benefit is equal to
$10,000 ($15,000 – $5,000). Answer (a) is incorrect because it
ignores the interest savings. Answer (b) is incorrect because it
only considers the bank charge.