Professional Documents
Culture Documents
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.
Chapter 20 : Accounts Receivable and Inventory Management
Terms of Sale
Annualized opportunity cost of foregoing a discount:
Type of customer
The costs associated with extending credit to lower-quality customers include: a. Increased costs of credit investigation b. Increased probability of customer default c. Increased collection costs
Credit scoring
The numerical credit evaluation of each candidate
Collection efforts
The key to maintaining control over the collection of accounts receivable is the fact that the probability of default increase with the age of the account
One common way of evaluating the current situation is ratio analysis. examining the average collection period ratio of receivables to assets ratio of credit sales to receivables (accounts receivable turnover ratio) amount of bad debts relative to sales over time aging of accounts receivable schedule
Chapter 20 : Accounts Receivable and Inventory Management
Once delinquent accounts have been identified, the third and final variable is determined by the firm s collection policies. A direct trade-off does exist between collection expenses and lost goodwill on one hand and non-collection of accounts on the other, and this trade-off is always part of making the decision.
Chapter 20 : Accounts Receivable and Inventory Management
Credit should be extended to the point that marginal profitability on additional sales equals the required rate of return on the additional costs we have to consider investment in inventories + receivables + change in cost of cash discount to generate those sales.
INVENTORY MANAGEMENT
Inventory Management
Raw Materials Inventory
Stock of Cash
Types of Inventory
Work-InProcess Inventory
In order to effectively manage the investment in inventory, there are two problems must be dealt with: a) Order Quantity Problem(how much to order) b) Order Point Problem (how often to order)
The economic order quantity (EOQ) model attempts to determine the order size that will minimize total inventory costs.
Inventory Cost
Carrying Costs
Average Inventory Carrying Cost per Unit
Q 2
C
Where : Q = the inventory size (in unit) C = Carrying cost per unit
Warehouse rent Insurance Security costs Utility costs Maintenance costs Property taxes Move and re-arrange, obsolescence, and Opportunity cost, i.e., using cash for profitable projects rather than being tied up in inventory
The EOQ Model assumes the firm orders a fixed amount (Q) at equal intervals.
Order Quantity Q
Time
Chapter 20 : Accounts Receivable and Inventory Management
Average inventory =
Order Quantity 2
Order Quantity Q
Time
Chapter 20 : Accounts Receivable and Inventory Management
Carrying Costs
Inventory Cost
Ordering Costs
Number of Orders Ordering Cost per order
Clerical expense Telephone Material Resource Planning (MRP) system Managementtime Receiving cost
S Q
O
Where : Q = the inventory size (in unit) S = total demand in units over planning period
Chapter 20 : Accounts Receivable and Inventory Management
Ordering costs per unit go down as order size increases. Assumes ordering costs are relatively fixed.
Total Cost = Q x C + S x O 2 Q
Cost ($) Y
Carrying Costs = ( Q ) C 2
Ordering Costs
Chapter 20 : Accounts Receivable and Order Size (units) Inventory Management
= (S) O Q
Q 2
)C +(
S Q
)O
= Order Size (order quantity) = Annual Sales Volume = Carrying Cost per Unit = Ordering Cost per Order
Chapter 20 : Accounts Receivable and Inventory Management
Q* =
2 SO C
Q=
2xSxO C
= 49.96 } 50 cars
b. How many orders per year? How much does it cost? Q = autos in each order Order/year= S/Q = 1,560/ 50 = 31.2 orders each year Ordering cost = 31.2 x $40 = $1,248
Chapter 20 : Accounts Receivable and Inventory Management
Order new inventory when the level of inventory falls to this level
Delivery-time stock
Safety stock
Average = inventory
EOQ 2
+ safety stock
EOQ
50
Time
Objectives
Determining Optimal Inventory to determine the order size that will minimize total inventory costs.
Q* =
2SO C
where Q*= the optimal order quantity in units O = ordering cost per order S = total demand in units over the planning period C = cost of carrying 1 unit in inventory Chapter 20 : Accounts Receivable and
Inventory Management
Example:
Lumber Autos expects to sell 1,560 new automobiles in the next year. It currently costs $40 per order placed with the manufacturer. Carrying costs amount to $50 per auto. How many autos should they order each time they place an order?
Q* =
2SO C
2(1560)40 50
= 49.96 } 50 cars