Chapter 20 - Chapter 20 - Accounts Accounts Receivable and Inventory Receivable and Inventory Management Management 2005, Pearson Prentice Hall
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Chapter 20 -Chapter 20 - Accounts Accounts Receivable and Inventory Receivable and Inventory
ManagementManagement
2005, Pearson Prentice Hall
Accounts Receivable Accounts Receivable ManagementManagement
Size of Investment in Accounts ReceivableSize of Investment in Accounts Receivable
Percent of Credit Sales to Total SalesPercent of Credit Sales to Total Sales
Level of SalesLevel of Sales
Terms of SaleTerms of Sale
Quality of CustomerQuality of Customer
Collection EffortsCollection Efforts
Accounts Receivable Accounts Receivable ManagementManagement
Terms of SaleTerms of Sale
Quoted as Quoted as a/b net ca/b net c , which means , which means “deduct “deduct a%a% if paid within if paid within bb days days, , otherwise pay within otherwise pay within cc days days.”.”
ExampleExample: : 3/30 net 603/30 net 60 means means “deduct 3% if paid within 30 days, “deduct 3% if paid within 30 days, otherwise pay the entire amount otherwise pay the entire amount within 60 days.”within 60 days.”
Accounts Receivable Accounts Receivable ManagementManagement
Terms of SaleTerms of Sale
Annualized opportunity cost of Annualized opportunity cost of foregoing a discount:foregoing a discount:
x
Accounts Receivable Accounts Receivable ManagementManagement
Terms of SaleTerms of Sale
Annualized opportunity cost of Annualized opportunity cost of foregoing a discount:foregoing a discount:
a 360a 360
1 - a c - b1 - a c - b
Accounts Receivable ManagementAccounts Receivable Management
a 360a 360 1 - a c - b1 - a c - b
x
Accounts Receivable ManagementAccounts Receivable Management
a 360a 360 1 - a c - b1 - a c - b
Opportunity cost of foregoing Opportunity cost of foregoing 3/30 net 603/30 net 60::
x
Accounts Receivable ManagementAccounts Receivable Management
a 360a 360 1 - a c - b1 - a c - b
opportunity cost of foregoing opportunity cost of foregoing 3/30 net 603/30 net 60::
.03 360.03 360
1 - .03 60 - 301 - .03 60 - 30
x
x
Accounts Receivable ManagementAccounts Receivable Management
a 360a 360 1 - a c - b1 - a c - b
opportunity cost of foregoing opportunity cost of foregoing 3/30 net 603/30 net 60::
.03 360.03 360
1 - .03 60 - 301 - .03 60 - 30
= 37.11%= 37.11%
x
x
Accounts Receivable ManagementAccounts Receivable Management
Inventory ManagementInventory Management
Too much inventory is expensive Too much inventory is expensive and wasteful.and wasteful.
Not enough inventory can result Not enough inventory can result in lost sales.in lost sales.
Inventory ManagementInventory Management
Raw materials inventoryRaw materials inventory - basic materials - basic materials to be used in the firm’s production to be used in the firm’s production operations.operations.
Work-in-process inventoryWork-in-process inventory - partially - partially finished goods requiring additional work finished goods requiring additional work before becoming finished goods.before becoming finished goods.
Finished-goods inventoryFinished-goods inventory - completed - completed products that are not yet sold.products that are not yet sold.
Stock of cashStock of cash - inventory of cash to allow - inventory of cash to allow payment of bills.payment of bills.
Inventory ManagementInventory Management
Optimal inventory order sizeOptimal inventory order size: the : the Economic Order Quantity (EOQ) Economic Order Quantity (EOQ) model:model:
Optimal inventory order sizeOptimal inventory order size: the : the Economic Order Quantity (EOQ) Economic Order Quantity (EOQ) model:model:
2SO2SO
CCQ* =
Inventory ManagementInventory Management
2SO C
Inventory ManagementInventory Management
Q =Q = inventory order size in units inventory order size in units
C =C = cost of carrying 1 unit in inventory cost of carrying 1 unit in inventory
S =S = total demand in units over planning total demand in units over planning period period
O =O = ordering cost per order ordering cost per order
Q* =
Example: Inventory ManagementExample: Inventory Management
Q =Q = inventory order size in units inventory order size in units
C =C = cost of carrying 1 unit in inventory cost of carrying 1 unit in inventory = 1.25= 1.25
S =S = total demand in units over planning total demand in units over planning period = period = 10,000 units10,000 units
O =O = ordering cost per order = ordering cost per order = $250$250
2SO C
Q* =
Example: Inventory ManagementExample: Inventory Management
Example: Inventory ManagementExample: Inventory Management
2SO2SO CC
Q* =
Example: Inventory ManagementExample: Inventory Management
2SO2SO CC
22xx250250xx10,00010,000
1.25 1.25
Q* =
Q* =
Example: Inventory ManagementExample: Inventory Management
2SO2SO CC
22xx250250xx10,00010,000
1.25 1.25
= 2,000 units= 2,000 units
Q* =
Q* =
Order Point ProblemOrder Point Problem
AverageAverage EOQ EOQ
inventoryinventory 2 2= + safety stock
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