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
C Q* =
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