Troy Toys is a retailer operating in several cities. The
individual store managers deposit daily collections at a local bank
in a noninterest-bearin... Accounting MCQs | Accounting MCQs

Troy Toys is a retailer operating in several cities. The
individual store managers deposit daily collections at a local bank
in a noninterest-bearing checking account. Twice per week, the
local bank issues a depository transfer check (DTC) to the central
bank at headquarters. The controller of the company is considering
using a wire transfer instead. The additional cost of each
transfer would be $25; collections would be accelerated by two
days; and the annual interest rate paid by the central bank is 7.2%
(0.02% per day). At what amount of dollars transferred would it
be economically feasible to use a wire transfer instead of the
DTC? Assume a 360-day year.

It would never be economically feasible.
$125,000 or above.
Any amount greater than $173.
Any amount greater than $62,500.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

(d) The requirement is to determine the effect of changing
from using a depository transfer check to using a wire transfer.
The change is feasible if the interest savings offsets the increased
costs. For a fee of $25, the firm gets two extra days’
interest on the average transfer amount. By dividing the $25 fee
by the interest rate for two days, .04% (2 days × .02%), we get
$62,500. Therefore, management should make the change if the
average transfer is expected to be greater than $62,500. Answer
(a) is incorrect because it is a calculating assuming there is
only a one-day decrease in float.