Ch. 20: Accounts Receivable and Inventory Management 2002, Prentice Hall, Inc

Ch. 20: Accounts Receivable and Inventory Management

2002, Prentice Hall, Inc.

Accounts Receivable Management

Size of Investment in Accounts Receivable

• Percent of Credit Sales to Total Sales

• Level of Sales

• Terms of Sale

• Quality of Customer

• Collection Efforts

Accounts Receivable Management

Terms of Sale

• quoted as a/b net c , which means “deduct a% if paid within b days, otherwise pay within c days.”

• example: 3/30 net 60, means “deduct 3% if paid within 30 days, otherwise pay the entire amount within 60 days.”

Accounts Receivable Management

Terms of Sale

• annualized opportunity cost of foregoing a discount:

x

Accounts Receivable Management

Terms of Sale

• annualized opportunity cost of foregoing a discount:

a 360

1 - a c - b

Accounts Receivable Management

a 360 1 - a c - b

x

Accounts Receivable Management

a 360 1 - a c - b

opportunity cost of foregoing 3/30 net 60:

x

Accounts Receivable Management

a 360 1 - a c - b

opportunity cost of foregoing 3/30 net 60:

.03 360

1 - .03 60 - 30

x

x

Accounts Receivable Management

a 360 1 - a c - b

opportunity cost of foregoing 3/30 net 60:

.03 360

1 - .03 60 - 30

= 37.11%

x

x

Accounts Receivable Management

Inventory Management

• Too much inventory is expensive and wasteful.

• Not enough inventory can result in lost sales.

Inventory Management

• Raw materials inventory - basic materials to be used in the firm’s production operations.

• Work-in-process inventory - partially finished goods requiring additional work before becoming finished goods.

• Finished-goods inventory - completed products that are not yet sold.

• Stock of cash - inventory of cash to allow payment of bills.

Inventory Management

• Optimal inventory order size: the Economic Order Quantity (EOQ) model:

• Optimal inventory order size: the Economic Order Quantity (EOQ) model:

2SO

CQ* =

Inventory Management

2SO C

Inventory Management

Q = inventory order size in units

C = cost of carrying 1 unit in inventory

S = total demand in units over planning period O = ordering cost per order

Q* =

Example: Inventory Management

Q = inventory order size in units

C = cost of carrying 1 unit in inventory = 1.25

S = total demand in units over planning

period = 10,000 units

O = ordering cost per order = $250

2SO C

Q* =

Example: Inventory Management

Example: Inventory Management

2SO C

Q* =

Example: Inventory Management

2SO C

2x250x10,000

1.25

Q* =

Q* =

Example: Inventory Management

2SO C

2x250x10,000

1.25

= 2,000 units

Q* =

Q* =

Order Point Problem

Average EOQ

inventory 2= + safety stock