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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
