Flashbinder Guitars,Inc.is considering a lockbox system that will increase its check processing cost by $.20 per check.The company estimates an average check size of $900 and expects any funds freed up by the new lockbox system can be invested in an account that earns 4% per year before taxes.What reduction in collection time is necessary for the lockbox to be beneficial to Flashbinder Guitars,Inc.?

Question

Quizplus · Accepted Answer

To determine the point where the lockbox would be beneficial, we need to calculate the cost of processing checks without the lockbox and compare it to the opportunity cost of investing freed-up funds.

Cost of processing checks without lockbox = check processing cost + mailing cost
= $.60 (check processing cost) + $.05 (mailing cost)
= $.65 per check

Opportunity cost of investing freed-up funds = 4% * $900 = $36

Therefore, the reduction in collection time necessary to offset the lockbox processing cost is:

$.20t = $.65t - $36
$.45t = $36
t = 80/45 = 1.78 days

Therefore, the lockbox would be beneficial if it reduces the collection time by at least 1.78 days.

Among the given choices, the only option closest to 1.78 is B, which is 2.03 days. Therefore, the best choice is B.