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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
a 360
x
1-a c - b
.03 360
x
1 - .03 60 - 30
Accounts Receivable Management
a 360
x
1-a c - b
.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