Chapter 20 Accounts Receivable and Inventory Management 2005
Chapter 20 - Accounts Receivable and Inventory Management Ó 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:
Accounts Receivable Management Terms of Sale § Annualized opportunity cost of foregoing a discount: a 1 -a x 360 c - b
Accounts Receivable Management
Accounts Receivable Management a 1 -a x 360 c - b
Accounts Receivable Management a 1 -a x 360 c - b Opportunity cost of foregoing 3/30 net 60:
Accounts Receivable Management a 1 -a x 360 c - b opportunity cost of foregoing 3/30 net 60: . 03 1 -. 03 x 360 60 - 30
Accounts Receivable Management a 1 -a x 360 c - b opportunity cost of foregoing 3/30 net 60: . 03 1 -. 03 x = 37. 11% 360 60 - 30
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:
Inventory Management § Optimal inventory order size: the Economic Order Quantity (EOQ) model: Q* = 2 SO C
Inventory Management Q* = 2 SO C 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
Example: Inventory Management Q* = 2 SO C 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
Example: Inventory Management
Example: Inventory Management Q* = 2 SO C
Example: Inventory Management Q* = 2 SO C 2 x 250 x 10, 000 1. 25
Example: Inventory Management Q* = 2 SO C 2 x 250 x 10, 000 1. 25 = 2, 000 units
Order Point Problem Average = inventory EOQ 2 + safety stock
- Slides: 22