Essence of Skunk Fragrances, Ltd., sells 5,000 units of its perfume collection e

Question

Essence of Skunk Fragrances, Ltd., sells 5,000 units of its perfume collection each year at a price per unit of $380. All sales are on credit with terms of 1/10, net 30. The discount is taken by 35% of the customers. What is the amount of the company's accounts receivable? In reaction to sales by its main competitor, sewage spray, Essence of Skunk is considering a change in its credit policy to terms 3/10, net 30 to preserve its market share. How will this change in policy affect accounts receivable?

Explanation / Answer

Total Sales = 5000*$380 = $1,900,000 So 1/10 means 1% disc by 35% Cust = 1%*35%* $1,900,000 = $6,650 Sales Rxable of 35%*1900,000 = $665,000 SO Net Sales Rxable = $665,000 - 6650 = $658,350 Balance 65%*1900,000 = $1,235,000 So Total Acct Rxable = $1,235,000 + 658350 = $1,893,350 ......(a) When it is 3/10 means 3% disc by 35% Cust = 3%*35%* $1,900,000 = $19,950 Sales Rxable of 35%*1900,000 = $665,000 SO Net Sales Rxable = $665,000 - $19,950 = $645,050 Balance 65%*1900,000 = $1,235,000 So Total Acct Rxable = 1235000 + $645,050 = $1,880,050 ....(b) So Acct rxable will reduce by a-b = 1893350- $1,880,050 = $13,300

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