Newman Products has received proposals from several
banks to establish a lockbox system to speed up receipts. Newman
receives an average of 700 chec... Accounting MCQs | Accounting MCQs

Newman Products has received proposals from several
banks to establish a lockbox system to speed up receipts. Newman
receives an average of 700 checks per day averaging $1,800
each, and its cost of short-term funds is 7% per year. Assuming
that all proposals will produce equivalent processing results and
using a 360-day year, which one of the following proposals is
optimal for Newman?

A $0.50 fee per check.A flat fee of $125,000 per year.A fee of 0.03% of the amount collected.A compensating balance of $1,750,000.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

(d) The requirement is to determine the optimal agreement
for a lockbox system. The number of checks issued during
the year is determined by multiplying 700 times 360 days, which
results in a total of 252,000 checks. The total amount of collections
is equal to $453,600,000 (252,000 checks × $1,800 per
check). Answer (d) is correct because it results in the lowest cost
of $122,500 ($1,750,000 × 7%), which is the cost of maintaining
the compensating balance. Answer (a) is incorrect because it
results in a cost of $126,000 ($.50 × 252,000 checks). Answer
(b) is incorrect because it results in a cost of $125,000.
Answer (c) is incorrect because it results in a fee of $136,080 (3%
× $453,600,000).