Porter Corp. has just signed up for a lockbox. Management expects the lockbox to reduce the mail float by 2.3 days. The firm's sales on average are $41,250 a day, with the average check being $165. The bank charges $0.39 per processed check. Assume that there are 270 business days in a year and the opportunity cost of funds is 5 percent. What will the firm's savings be from using the lockbox?
A) $3,427.50
B) $975.50
C) $2,632.50
D) $94,875.00

Question

Quizplus · Accepted Answer

The firm's savings from using the lockbox will be $3,427.50. This is calculated as follows:Reduced mail float = 2.3 daysAverage daily sales = $41,250Average check amount = $165Number of business days in a year = 270Bank charge per processed check = $0.39Opportunity cost of funds = 5%Reduced mail float in dollars = Reduced mail float * Average daily sales * Average check amount= 2.3 days * $41,250 * $165= $1,546,875Savings from lockbox = Reduced mail float in dollars * Bank charge per processed check * Number of business days in a year * Opportunity cost of funds= $1,546,875 * $0.39 * 270 * 0.05= $3,427.50