Ch. 18: Accounts Receivable, Inventory, and Total Quality Management

Accounts Receivable Management Determinants of Accounts Receivable n Percent of Credit Sales to Total Sales n Level of Sales n Terms of Sale n Quality of Customer n Collection Efforts

Accounts Receivable Management Terms of Sale n quoted as a/b net c, which means “deduct a% if paid within b days, otherwise pay within c days.” n 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 n annualized opportunity cost of foregoing a discount:

x Accounts Receivable Management Terms of Sale n annualized opportunity cost of foregoing a discount: a 360 a a c - b 1 - a c - b

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

xx Accounts Receivable Management a 360 a a c - b 1 - a c - b opportunity cost of forgoing 3/30 net 60: = 37.11% = 37.11%

Inventory Management n Too much inventory is expensive and wasteful. n Not enough inventory can result in lost sales.

Inventory Management n Raw Materials Inventory - basic materials to be used in the firm’s production operations. n Work-in-Process Inventory - partially finished goods requiring additional work before becoming finished goods. n Finished goods Inventory - completed products that are not yet sold. n Stock of Cash - inventory of cash to allow payment of bills.

Inventory Management n Optimal inventory order size: the Economic Order Quantity (EOQ) model:

Q* = Inventory Management n Optimal inventory order size: the Economic Order Quantity (EOQ) model: 2SO 2SO C

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 S = total demand in units over planning period 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 S = total demand in units over planning period = 10,000 units 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 2x250x10,000 2x250x10, Q* =

Example: Inventory Management 2SO 2SO C 2x250x10,000 2x250x10, = 2,000 units = 2,000 units Q* =

Order Point Problem Average EOQ inventory 2 = + safety stock

n Total Quality Management: a company-wide systems approach to quality. n An effort to increase quality through better supplier relations. n Interdependence between supplier and customer allows for development of new, better products. TQM