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Accounts Receivable and

Inventory Management
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 360
x
1-a c - b
Accounts Receivable Management
Accounts Receivable Management

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

a 360
x
1-a c - b

Opportunity cost of foregoing 3/30 net 60:


Accounts Receivable Management

a 360
x
1-a c - b

opportunity cost of foregoing 3/30 net 60:

.03 360
x
1 - .03 60 - 30
Accounts Receivable Management

a 360
x
1-a c - b

opportunity cost of foregoing 3/30 net 60:

.03 360
x
1 - .03 60 - 30

= 37.11%
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:

2SO
Q* =
C
Inventory Management

Q* = 2SO
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* = 2SO
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* = 2SO
C
Example: Inventory Management

Q* = 2SO
C

Q* = 2x250x10,000
1.25
Example: Inventory Management

Q* = 2SO
C

Q* = 2x250x10,000
1.25

= 2,000 units
Order Point Problem

Average EOQ
= + safety stock
inventory 2

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