Essence of Skunk Fragrances, Ltd., sells 6,700 units of its perfume collection e

Question

Essence of Skunk Fragrances, Ltd., sells 6,700 units of its perfume collection each year at a price per unit of $397. All sales are on credit with terms of 3/20, net 40. The discount is taken by 45 percent of the customers.

Essence of Skunk Fragrances, Ltd., sells 6,700 units of its perfume collection each year at a price per unit of $397. All sales are on credit with terms of 3/20, net 40. The discount is taken by 45 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 rec eivable? (Round your answer to 2 decimal places (e.g., 32.16).) Average receivables Requirement 2: In reaction to sales by its main competitor, Sewage Spray, Essence of Skunk is considering a change in ts credit policy to terms of 5/20, net 40 to preserve its market share. Will this change in policy increase or decrease accounts receivable? Decrease

Explanation / Answer

Calculation of the Accounts Receivable Units 6700 Price 397 Total Sales 6700*397 2659900 The term 3/20 net 40 states that if the amount is paid within 20 days then the discount of 3% will be given, otherwise the credit period is 40 days Discount taken by 45% customers It means 55% customers are accounts receivable 2659900*55% 1462945 Accounts Receivable is $ 1462945 2 If the discount rate is increased, nmore people will apply the discount Hence, the Accounts Receivable will be decreased

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