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

2. 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

3. 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.”

4. Accounts Receivable Management Terms of Sale  Annualized opportunity cost of foregoing a discount:

5. x Accounts Receivable Management Terms of Sale  Annualized opportunity cost of foregoing a discount: a 360 a 360 1 - a c - b 1 - a c - b

6. Accounts Receivable Management

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

8. a 360 a 360 1 - 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

9. a 360 a 360 1 - a c - b 1 - a c - b opportunity cost of foregoing 3/30 net 60: opportunity cost of foregoing 3/30 net 60:.03 360.03 360 1 -.03 60 - 30 1 -.03 60 - 30 xx Accounts Receivable Management

10. a 360 a 360 1 - a c - b 1 - a c - b opportunity cost of foregoing 3/30 net 60: opportunity cost of foregoing 3/30 net 60:.03 360.03 360 1 -.03 60 - 30 1 -.03 60 - 30 = 37.11% = 37.11% xx Accounts Receivable Management

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

13. 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.

14. Inventory Management  Optimal inventory order size: the Economic Order Quantity (EOQ) model:

15. 2SO 2SO C Q* = Inventory Management

16. 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* =

17. 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* =

18. Example: Inventory Management

19. 2SO 2SO C Q* =

20. Example: Inventory Management 2SO 2SO C 2 x 250 x 10,000 2 x 250 x 10,000 1.25 1.25 Q* =

21. Example: Inventory Management 2SO 2SO C 2 x 250 x 10,000 2 x 250 x 10,000 1.25 1.25 = 2,000 units = 2,000 units Q* =

22. Order Point Problem Average EOQ inventory 2 = + safety stock