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.)

What is the amount of the company’s accounts receivable? (Round your answer to 2 decimal places (e.g., 32.16).)

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?

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.)

Explanation / Answer

Solution:

1)

Average Collection Period = (Percentage of Customer who avail discount x Credit Period allowed for availing cash discount) + (Percentage of Customer who not avail discount x Net Credit Period allowed for payment to customers)

Average Collection Period = (0.50 x 30 days) + (0.50 x 40 Days) = 15 days + 20 days = 35 days.

Explanation – 50% customer avail discount and pay within 30 days. 40% customer does not avail discount and pay amount in 60 days. Hence Average Collection from the customer who avail discount is 50% x 30 days = 15 days and the average collection period from the customer who not avail the discount and pay within 40 days = 50% x 40 days = 20 days.

Forecasted monthly sales unit = 5,700 Units

Selling Price per Unit = $387

Total Monthly Sales in dollars = 5,700 x $387 = $2,205,900

Average Accounts Receivable = Total Monthly Average Sale x average collection period / 360 days

= $2,205,900 x 35 / 360 = $214,462.50

Assumed 1 year = 360 days

2)

New Credit Policy term = 4/30, net 40

It means 4% cash discount can be availed if payment will be done within 30 days, other wise pay the amount in 40 days with no discount.

It will definitely decrease the Average Accounts Receivables to the company because they are giving 4% discount instead of 2% what they are giving earlier.

If percentage of customer to take cash discount advantage increases then Average Accounts Receivables are go down of the company.

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