Management of Radker Corp. is considering a lockbox system.
The bank will charge $10,000 annually for the service,
which will save the firm approxim... Accounting MCQs | Accounting MCQs

Management of Radker Corp. is considering a lockbox system.
The bank will charge $10,000 annually for the service,
which will save the firm approximately $5,000 in processing
costs. The lockbox system will reduce the float for cash receipts
by three days. Assuming that the average daily receipts are equal
to $100,000, and short-term interest costs are 5%, calculate the
benefit or loss from adopting the lockbox system.

$5,000 loss.
$10,000 loss.
$10,000 benefit.
$5,000 benefit.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

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.