Essence of Skunk Fragrances, Ltd., sells 5,700 units of its perfume collection e

Question

Essence of Skunk Fragrances, Ltd., sells 5,700 units of its perfume collection each year at a price per unit of $387. All sales are on credit with terms of 2/30, net 40. The discount is taken by 50 percent of the customers. (Enter your answer as directed, but do not round intermediate calculations.) Requirement 1: What is the amount of the company's accounts receivable? (Round your answer to 2 decimal places (e.g., 32.16).) Requirement 2: In reaction to sales by its main competitor, Sewage Spray, Essence of Skunk is considering a change in its credit policy to terms of 4/30, net 40 to preserve its market share. Will this change in policy increase or decrease accounts receivable?

Explanation / Answer

TOTAL CREDIT SALES

= 5700 * $387

= $2205900

AVERAGE COLLECTION PERIOD

= 30DAYS * 50% + 40 DAYS * 50%

= 35DAYS

RECEIVABLE TURNOVER RATIO

= 365 / AVERAGE COLECTION PERIOD

= 365 / 35

= 10.43 TIMES

AVERAGE RECEIVABLE

= TOTAL CREDIT SALES / RECEIVABLE TURNOVER RATIO

= $2205900 / 10.43

= $211495.69

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IF THE FIRM INCREASES THE CASH DISCOUNT, MORE PEOPLE WILL PAY SOONER, THUS LOWERING THE AVERAGE COLLECTION PERIOD. IF THE ACP DECLINES, THE RECEIVABLES TURNOVER INCREASES, WHICH WILL LEAD TO A DECREASE IN THE ACCOUNTS RECEIVABLES.

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