A Firm That Is Located in Toronto Receives on the Average

A firm that is located in Toronto receives on the average 2,000 cheques a day from its customers in the Vancouver area.Average payment per cheque is $1,500.A bank in Vancouver is offering a lock-box arrangement for collection and processing of these cheques at a cost of $0.50 per cheque.This arrangement will reduce the float by two days.The daily interest rate for the firm is 0.02 percent.What is the net saving from the lock-box arrangement?

A) $200
B) $400
C) $1,000
D) $1,200 Reduction in availability float = 2,000 x 1,500 x 2 days
= 6,000,000
Interest savings = 6,000,000 x 0.0002 = 1,200
Cost of processing = 0.5 x 2,000 = 1,000