This question asking for what is the minimum amount you have to send through the wire transfer compared with DTC, Here the cost of short-term funds averages 9% and it means 2 days delay will cost 0.05% in finance cost ( 9%/ 365 * 2 Days).
In that case, you are paying $10.5 extra service charge for getting money immediately by avoiding two days delay. So for paying $10.5 dollar charge u have to send minimum 21000 (10.5/0.05% *100) to avoid the financial cost to two days.
Exa: If you are sending $ 25000 in DTC finance cost is 0.05% is $ 12.5 you have to bear, So paying $10.5 extra for wire transfer you can save $2 (12.5-10.5)
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ARUN PARAMBATH
Analyst
KOZHIKODE
India
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Original Message:
Sent: 10-11-2020 11:36 AM
From: Tayba Al-Mehdar
Subject: Subunit 2: Cost-Volume-Profit (CVP) Analysis -- Theory
can someone help in understanding this message
Question: 23A company requires its branch offices to transfer cash balances once per week to the central corporate account. A wire transfer costs $12 and assures the cash is available the same day. A depository transfer check (DTC) costs $1.50 and generally results in funds being available in 2 days. The company's cost of short-term funds averages 9%, and they use a 360-day year in all calculations. What is the minimum transfer amount that would justify the cost of a wire transfer as opposed to a DTC? | |
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| Answer (C) is correct.
To break even, the interest that the company can earn on the early deposits must at least equal the excess of the wire transfer fee over the cost of the DTC.Transfer amount × 9% × (2 days ÷ 360 days) | = | $12 WT – $1.50 DTC | Transfer amount × .05% | = | $10.50 | Transfer amount | = | $21,000 |
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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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