Essence of Skunk Fragrances, Ltd., sells 5,800 units of its perfume collection e

Question

Essence of Skunk Fragrances, Ltd., sells 5,800 units of its perfume collection each year at a price per unit of $388. All sales are on credit with terms of 3/10, net 50. The discount is taken by 35 percent 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 of 5/10, net 50 to preserve its market share. Will this change in policy increase or decrease accounts receivable?

Explanation / Answer

Answer: 1

Answer: 2

Change in Credit Policy ie  5/10, net 50 from 3/10, net 50 means that Company will give 5% Cash discount in place of 3% Cash discount on payment within 10 days.

By Increase in cash discount, more people will tend to pay sooner, which will result in decrease the average collection period.

If the Average Collection Period decreases, the receivables turnover will increase, which will lead to a decrease in the average receivables.

Total Credit Sales: 5800*$388 2250400 % of accounts taking the discount 35% % of accounts not taking the discount: (100%-35%) 65% Average Collection Period =( 0.35*10 days)+(0.65*50 days) 36 Days Receivable Turnover = 365/Average Collection Period Receivable Turnover = 365/36 = 10.13889 10.13889 Accounts Receivable= Credit Sales/Accounts Receivable Accounts Receivable= 2250400/10.13889 221957

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