Chapter 20 - Accounts Receivable and Inventory Management

8/14/2019 Chapter 20 - Accounts Receivable and Inventory Management

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Chapter 20 -Chapter 20 - AccountsAccounts

Receivable and InventoryReceivable and InventoryManagementManagement

2005, Pearson Prentice Hall


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Accounts ReceivableAccounts 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


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Terms of SaleTerm

s of Sale

Quoted asQuoted as a/b net ca/b net c , which means, which means

deductdeduct a%a% if paid withinif paid within bb daysdays,,otherwise pay withinotherwise pay within cc daysdays..

ExampleExample:: 3/30 net 603/30 net 60 meansmeans

deduct 3% if paid within 30 days,deduct 3% if paid within 30 days,

otherwise pay the entire amountotherwise pay the entire amount

within 60 days.within 60 days.


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Terms of SaleTerm

s of Sale

Annualized opportunity cost ofAnnualized opportunity cost offoregoing a discount:foregoing a discount:


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x



Terms of SaleTerm

s of Sale

Annualized opportunity cost ofAnnualized opportunity cost offoregoing a discount:foregoing a discount:

a 360a 3601 - a c - b1 - a c - b


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a 360a 360

1 - a c - b1 - a c - b

x

Accounts Receivable ManagementAccounts Receivable Management


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a 360a 360

1 - a c - b1 - a c - b

Opportunity cost of foregoingOpportunity cost of foregoing 3/30 net 603/30 net 60::

x



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a 360a 360

1 - a c - b1 - a c - b

opportunity cost of foregoingopportunity 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



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Inventory ManagementInventory Management

Too much inventory is expensiveToo much inventory is expensiveand wasteful.and wasteful.

Not enough inventory can resultNot enough inventory can result

in lost sales.in lost sales.


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Raw materials inventoryRaw materials inventory - basic materials- basic materialsto be used in the firms productionto be used in the firms production

operations.operations.

Work-in-process inventoryWork-in-process inventory

- partially- partially

finished goods requiring additional workfinished 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.


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Optimal inventory order sizeOptimal inventory order size: the: theEconomic Order Quantity (EOQ)Economic Order Quantity (EOQ)

model:model:


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Optimal inventory order sizeOptimal inventory order size: the: theEconomic Order Quantity (EOQ)Economic Order Quantity (EOQ)

model:model:

2SO2SO

CC

Q* =



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Example: Inventory ManagementExample: Inventory Management

Q =Q = inventory order size in unitsinventory order size in units

C =C = cost of carrying 1 unit in inventorycost of carrying 1 unit in inventory = 1.25= 1.25

S =S = total demand in units over planningtotal 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* =


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2SO2SO

CC

Q* =


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2SO2SO

CC

22xx250250xx10,00010,000

1.251.25

Q* =

Q* =


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2SO2SO

CC

22xx250250xx10,00010,000

1.251.25

= 2,000 units= 2,000 units

Q* =

Q* =


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Order Point ProblemOrder Point Problem

AverageAverage EOQEOQinventoryinventory 22

= + safety stock

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Chapter 20 - Accounts Receivable and Inventory Management