© Prentice Hall, 1997 1 MBA 622 Brief Accounts Receivable and Inventory Management Portions from...
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© Prentice Hall, 1997 1 MBA 622 Brief Accounts Receivable and Inventory Management Portions from Emery and Finnerty: Corporate Financial Management – Edited by Del Hawley
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Transcript of © Prentice Hall, 1997 1 MBA 622 Brief Accounts Receivable and Inventory Management Portions from...
© Prentice Hall, 1997
1
MBA 622
Brief Accounts Receivable and Inventory Management
Portions from Emery and Finnerty: Corporate Financial Management – Edited by Del Hawley
© Prentice Hall, 1997
2
Effective Use of Trade Credit
Advantages: Readily available Informal Flexible Stretching payments
Disadvantages High cost of discounts foregone Excessive stretching of payments
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Trade Credit Terms
Common credit terms:
Net 30
2/10 Net 30
Meaning:
(Disc%)/(Days to get discount) (Date Due)
2/10 Net 30 2% discount if paid within 10
days; otherwise pay within 30 days
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Cost of Trade Credit
Discount Music Stores buys its inventory on “1/10, net 30” terms. What is the cost of not taking the discount?
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Cost of Trade Credit
Let d = the amount of the discount (= 1%)
Let DP = the discount period (= 10 days)
Let TP = the total payment period (= 30 days)
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Cost of Trade Credit
1030
365
01.1
01.1843.
365
1
DPTPd
dAPR
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Cost of Trade Credit
Pay on Day 40 12.29%
Pay on Day 60 7.37%
So, there is an incentive to pay late that the seller must counter.
The cost of foregoing the discount must be higher that cost of short-term borrowing or the buyer will use the trade credit as a loan.
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Pursuing Delinquent Accounts
Letters
Telephone calls
Personal visits
Collection agencies
Legal proceedings
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9
Inventory Management
Types of inventories: Raw materials Work-in-process Finished goods
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Economic Order Quantity (EOQ) Model
Let S = constant usage rate of the inventory F = fixed cost of ordering inventory C = carrying cost per unit of inventory for the
period. Q = units of inventory ordered.
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Inventory Levels for the EOQ Model
Time
Inventory Level
Q
Q/2
0
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Economic Order Quantity (EOQ) Model
Total cost = Ordering cost + Carrying cost
FSQ
CQ2
EOQFSC
2
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Economic Order Quantity (EOQ) Model
Annual Cost
Total Cost
Carrying Cost
Ordering Cost
Order Quantity (Q)
Minimum Cost
Q*
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EOQ Model
The Acer Co. sells 10,000 units per year. The cost of placing one order is $45 and it costs $4 per year to carry one unit of inventory.
What is Acer’s EOQ?
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EOQ Model
EOQFSC
units
2
2 10 000475
$45 ,
$4a fa f
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EOQ Model
Average inventory = Q/2 = 475/2 = 237.5 units.
Number of orders per year = S/Q = 10,000/475 = 21.
Time between orders = Q/S = (475/21)(365) = 17.34 days.
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EOQ Model
Annual ordering cost = F(S/Q) = $45(10,000/475) = $947 per year.
Annual holding cost = C(Q/2) = $4(475/2) = $950 per year.
Total annual cost = $947 + $950 = $1,897 per year.
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Just-In-Time (JIT) Inventory Systems
Materials should arrive exactly as they are needed in the production process. Reduces inventory holding costs
Important factors determining success of JIT systems: Planning requirements Supplier relations Setup costs Other cost factors Impact on credit terms
