On an average day, BJ Footwear receives $26,482 in checks from customers. These checks clear the bank in an average of 1.3 days. The applicable daily interest rate is .016 percent. What is the highest daily fee that should be paid to completely eliminate the collection float? Assume each month has 30 days.

Question

Quizplus · Accepted Answer

To eliminate the collection float, BJ Footwear needs to speed up their check processing time to 0 days. This means they need to use a courier or a lockbox system, which incurs a fee. To find the highest daily fee that should be paid to eliminate the float, we need to calculate the daily interest cost of the float and compare it to the daily fee.

First, we need to calculate the average amount of the float:

Float = Average daily checks x Average check processing time = $26,482 x 1.3 days = $34,377.60

Next, we need to calculate the daily interest cost of the float:

Daily interest cost = Float x Daily interest rate = $34,377.60 x 0.00016 = $5.500416

Since each month has 30 days, the monthly interest cost of the float is:

Monthly interest cost = Daily interest cost x Number of days in a month = $5.500416 x 30 = $165.01248

Now we can compare the monthly interest cost to the daily fee of using a courier or lockbox system. Let's assume that the fee is a flat rate of $x per day. To eliminate the float, the daily fee needs to be:

Daily fee = Monthly interest cost / Number of days in a month = $165.01248 / 30 = $5.500416 / day

So the daily fee needs to be at least $5.500416 to eliminate the float. The closest answer choice to this is B, $5.51. Therefore, the answer is B.

On an Average Day, BJ Footwear Receives $26,482 in Checks