Chapter 20 - Accounts Receivable and Inventory Management  2005, Pearson Prentice Hall

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 a a c - b 1 - a c - b

Accounts Receivable Management

a 360 a a c - b 1 - a c - b x Accounts Receivable Management

a 360 a a c - b 1 - a c - b Opportunity cost of foregoing 3/30 net 60: Opportunity cost of foregoing 3/30 net 60: x Accounts Receivable Management

a 360 a a c - b 1 - a c - b opportunity cost of foregoing 3/30 net 60: opportunity cost of foregoing 3/30 net 60: xx Accounts Receivable Management

a 360 a a c - b 1 - a c - b opportunity cost of foregoing 3/30 net 60: opportunity cost of foregoing 3/30 net 60: = 37.11% = 37.11% xx 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:

2SO 2SO C Q* = Inventory Management

2SO C Inventory Management Q = inventory order size in units Q = inventory order size in units C = cost of carrying 1 unit in inventory C = cost of carrying 1 unit in inventory S = total demand in units over planning period S = total demand in units over planning period O = ordering cost per order O = ordering cost per order Q* =

Example: Inventory Management Q = inventory order size in units Q = inventory order size in units C = cost of carrying 1 unit in inventory = 1.25 C = cost of carrying 1 unit in inventory = 1.25 S = total demand in units over planning period = 10,000 units S = total demand in units over planning period = 10,000 units O = ordering cost per order = $250 O = ordering cost per order = $250 2SO C Q* =

Example: Inventory Management

2SO 2SO C Q* =

Example: Inventory Management 2SO 2SO C 2 x 250 x 10,000 2 x 250 x 10, Q* =

Example: Inventory Management 2SO 2SO C 2 x 250 x 10,000 2 x 250 x 10, = 2,000 units = 2,000 units Q* =

Order Point Problem Average EOQ inventory 2 = + safety stock