Question

Essence of Skunk Fragrances, Ltd., sells 6,700 units of its perfume collection each year at a price per unit of $215. All sales are on credit with terms of 1/10, net 30. The discount is taken by 60 percent of the customers a. What is the amount of the company's accounts receivable? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. In reaction to sales by its main competitor, Sewage Spray, Essence of Skunk is considering a change in its credit policy to terms of 3/10, net 30 to preserve its market share. Will this change in policy increase or decrease accounts receivable? a. Average receivables b. Accounts receivable Decrease

Answer 1

a). DSO = Days taken by customers taking discount + Days taken by customers not taking discount

= [0.60 * 10] + [(1 - 0.60) * 30] = 6 + 12 = 18 days

DSO = 365 / [Sales / Accounts Receivable]

18 = 365 / [($215 * 6,700) / Accounts Receivable]

$1,440,500 / Accounts Receivable = 365 / 18

Accounts Receivable = $1,440,500 / 20.28 = $71,038.36

b). As the discount % is increased for customers paying early will lead to more customers paying early to avail this higher discount, which will lead to decrease in the accounts receivable.