Chapter 9 & 10 accounts receivable and inventory management

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Chapter 9 & 10 accounts receivable and inventory management

  1. 1. Accounts Receivable and Inventory Management  2005, Pearson Prentice Hall
  2. 2. Accounts Receivable ManagementTerms 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.”
  3. 3. Accounts Receivable ManagementTerms of Sale Annualized opportunity cost of foregoing a discount:
  4. 4. Accounts Receivable ManagementTerms of Sale Annualized opportunity cost of foregoing a discount: a 360 x 1-a c - b
  5. 5. Accounts Receivable Management a 360 x 1-a c - bopportunity cost of foregoing 3/30 net 60: .03 360 1 - .03 x 60 - 30 = 37.11%
  6. 6. Inventory Management Too much inventory is expensive and wasteful. Not enough inventory can result in lost sales.
  7. 7. 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.
  8. 8. Inventory Management Optimal inventory order size: the Economic Order Quantity (EOQ) model: 2SO Q* = C
  9. 9. Inventory Management Q* = 2SO CQ = inventory order size in unitsC = cost of carrying 1 unit in inventoryS = total demand in units over planning periodO = ordering cost per order
  10. 10. Example: Inventory Management Q* = 2SO CQ = inventory order size in unitsC = cost of carrying 1 unit in inventory = 1.25S = total demand in units over planning period = 10,000 unitsO = ordering cost per order = $250
  11. 11. Example: Inventory Management 2SO Q* = C Q* = 2x250x10,000 1.25 = 2,000 units
  12. 12. Order Point ProblemAverage EOQ = + safety stockinventory 2
  13. 13. Credit Policy Change Refer to pages 309 – 310 (Chapter 10)

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