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. Requirement 1: What is the amount of the company's accounts receivable? 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 5/10, net 50 to preserve its market share. Will this change in policy increase or decrease accounts receivable?

Explanation / Answer

Requirement 1 Gross Sales to customers 2250400.00 Less : Collections done for 35% of sales @ 3% discount 764010.80 Balance Receivables 1486389.20 Requirement 2 Gross Sales to customers 2250400.00 Less : Collections done for 35% of sales @ 5% discount 748258.00 Balance Receivables 1502142.00 The change in policy to increase the discount rate, will consequently increase the accounts receivables.

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