AICPA Exam CPA-Business Topic 1 Question 38 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 38
Topic #: 1

Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts. Newman receives an average of 700 checks per day averaging $1,800 each, and its cost of short-term funds is 7 percent per year. Assuming that all proposals will produce equivalent processing results and using a 360-day year, which one of the following proposals is optimal for Newman?

AA flat fee of $125,000 per year.

BA fee of 0.03 percent of the amount collected.

CA compensating balance of $1,750,000.

DA fee of $0.35 per check plus 0.01 percent of the amount collected.

Show Suggested Answer

Suggested Answer: C

Choice 'c' is correct. The optimal proposal is that which has the lowest cost for Newman.

Thus, the lowest cost is 'c' at $122,500.

Choices 'a', 'b', and 'd' are incorrect, per the above calculations/Explanation:.

by Lashandra at May 05, 2022, 03:57 AM

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