• 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. | Ch. 20: Accounts Receivable and Inventory Management 2002, Prentice Hall, Inc. 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: x Accounts Receivable Management Terms of Sale annualized opportunity cost of foregoing a discount: a 360 1 - a c - b Accounts Receivable Management a 360 1 - a c - b x Accounts Receivable Management a 360 1 - a c - b opportunity cost of foregoing 3/30 net 60: x Accounts Receivable Management a 360 1 - a c - b opportunity cost of foregoing 3/30 net 60: .03 360 1 - .03 60 - 30 x x Accounts Receivable Management a 360 1 - a c - b opportunity cost of foregoing 3/30 net 60: .03 360 1 - .03 60 - 30 = x x Accounts Receivable Management 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: Optimal inventory order size: the Economic Order Quantity (EOQ) model: 2SO C Q* = Inventory Management 2SO C Inventory Management 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 Q* = Example: Inventory Management Q = inventory order size in units C = cost of carrying 1 unit in inventory = S = total demand in units over planning period = 10,000 units O = ordering cost per order = $250 2SO C Q* = Example: Inventory Management Example: Inventory Management 2SO C Q* = Example: Inventory Management 2SO C 2x250x10,000 Q* = Q* = Example: Inventory Management 2SO C 2x250x10,000 = 2,000 units Q* = Q* = Order Point Problem Average EOQ inventory 2 = + safety stock | Ch. 20: Accounts Receivable and Inventory Management 2002, Prentice Hall, Inc. 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: x Accounts Receivable Management Terms of Sale annualized opportunity cost of foregoing a discount: a 360 1 - a c - b Accounts Receivable Management a 360 1 - a c - b x Accounts Receivable Management a 360 1 - a c - b opportunity cost of foregoing 3/30 net 60: x Accounts Receivable Management a 360 1 - a c - b opportunity cost of foregoing 3/30 net 60: .03 360 1 - .03 60 - 30 x x .
