Question

A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company's collection time by four days at a monthly fee of $2,500. If money market rates average four percent during the year, the additional annual income (loss) from using the lockbox service would be:

 

Answer 1

A company's decision to commit to a lockbox plan is an example of marginal analysis. In other words, do the marginal benefits exceed the marginal costs of the plan?

Marginal revenue equals:

Increase cash $150,000 per day

Receipts available × 4 days

For investment $600,000

Can be invested for yr:

at 4% x .04

MR $24,000

Less: marginal costs

Mo. Lockbox fee x 12

$2,500 x 12 = (30,000)

Loss on plan ($6,000)

If money market rates average four percent during the year, the additional annual income (loss) from using the lockbox service would be: $(6,000)