Masters Technological Institute of Mindanao Inventory Management – involves the determination of what

Management Advisory Services (MAS 1) inventory quality, quantity, timing, and location should be in
order to meet future business requirements.

RECEIVABLE & INVENTORY MANAGEMENT Formula to compute Economic Order Quantity

Receivable Management – The formulation and
administration of plans and policies related to sales on
account and ensuring the maintenance of receivables at a
predetermined level and their collectability as planned.
 Credit Policy
 Collection Policy
1. Economic Order Quantity (EOQ)
= / 2 x annual demand x cpo /ccpu
a) Total Inventory costs = Total Ordering cost + Total
Carrying Cost
b) Total Ordering cost = # of orders x cost per order
c) # of orders = Annual demand / Order size
d) Total carrying cost = Average inventory x carrying
cost per unit
e) Average Inventory = EOQ or order size / 2

Ratios affecting receivables 2. Reorder point = Lead time Quantity + Safety Stock
AR Turnover = Net Credit Sales / Ave. AR Balance 3. Lead Time Quantity = Normal Usage x Normal Lead
Collection Period = 360 days /AR Turnover Time
Collection Period = Ave days paid by the customer (with term 4. Safety Stock in time = (Maximum – Minimum Lead
discount) time ) x Normal Usage
Ave. AR = [(AR beg. + AR ending)/2] 5. Safety stock in usage = ( Maximum – Minimum
Ave AR = Ave. Daily Sales x Collection Period Usage) x Normal Lead Time

Problem 1- Relaxing Credit Standards Problem 5- Basic

Leila Company is considering relaxing its credit standards to Timy has been buying 3,600 circuit boards annually. At
increase its currently sagging sales. As a result of the present, the company purchase 1,200 every 4 months. The
proposed relaxation, sales are expected to increase by 20% cost per unit is P220. The order cost is P200 per order; annual
from 10,000 units to 12,000 units during the coming year, the inventory carrying cost per one unit is P25. Assume that the
average collection period is expected to increase from 45 to units will be required evenly throughout the year. Compute
60 days; and bad debts are expected to increase from 1% to for:
3% sales. The sales price per unit is P50, and the variable cost 1. EOQ
per unit id P30. If the firm’s return on equal-risk investments 2. Number of orders in a year
is 25%, determine the net advantage / or disadvantage of 3. Average inventory based on economic order
relaxing credit standard. quantity
4. Total carrying cost, ordering cost, and relevant
Problem 2- Tightening Credit Standards inventory cost at EOQ.
A company plans to tighten its credit policy. The new policy
will decrease the average number of days in collection from Problem 6 – Reorder point, lead time quantity, safety stock
72 to 60 days and will reduce the ratio of credit sales to total quantity
revenue from 70% to 60%. The company estimated that Dole Inc. makes available the following information relative
projected sales will be 5% les of the proposed new credit to its Can materials
policy is implemented. The firm’s short-term interest cost is Annual Demand 60,000 units
10%. Working Days in a year 300 days
a) If projected Sales for the coming year are P50 Normal Lead Time 10 days
million, calculate the peso impact on accounts Maximum Lead time 15 days
receivable of this project change in credit policy. Maximum usage per working day 300 units
Assume 360-day year. Economic Order size 6,000 units
b) What effect would the implementation of this new
credit policy have on income before taxes? Required: Calculate the following
1. Lead Time Quantity
Problem 3- Shortening the credit period 2. Safety stock Quantity
A firm is encouraging shortening in credit period from 40 to 3. Reorder Point
30 days and believes that as a result of the change , its 4. Average Inventory
average collection period will decline from 45 to 36 days. Bad
debts expenses are expected to decrease from 1.5% to 1% of Problem 7 – effects of discounts
sales. The firm is currently selling 12,000 units but believes PBB currently purchases its raw materials at economic order
that as a result of the proposed change, sales will decline to level. The material cost is P20 per unit and the company
10,000 units. The sales price per unit is P50, and its variable carries its average inventory at P5 per unit. It incurs cost per
cost per unit is P40. The firm’s required rate of return is 25%. order at P30 and uses 67,500 raw materials annually. Its
Determine the net effect to profit of shortening the credit supplier has offered a 5% discount on all purchases if the
period. company buys on a quarterly basis.
Required:
Problem 4 – Initiating cash discounts 1. Compute for EOQ
Jadine Company currently makes all sales on credit and offers 2. Determine the net savings if PBB accepts the
no cash discount. The firm is considering a 2% cash discount supplier’s offer to buy on a quarterly basis
for payment within 15 days. The firm’s current average
collection period is 60 days, sales are 40,000 units, selling Problem 8 – Optimum Safety stock
price is P45 per unit, and variable cost per unit is P36. The Stargate Corporation’s inventory carrying cost per unit is P10
firm expects that the change in credit terms will result in an and its stockout cost per unit is P4. It makes 8 purchase
increase in sales of P42,000 units, that 20% of the sales will orders a year. The company plans to maintain a safety stock
take the discount, and that the average collection period will quantity either 100 units or 200 units. The following data
fall to 30 days. If the firm’s required rate of return is 25%, were gathered for further analysis:
determine the net benefit (cost) of offering a cash discount.
Total Available Excess Probability
Needs Stock demand
600 600 0 45%
700 600 100 30%
800 600 200 15%
900 600 300 10%

Determine the following:

1. Total Safety stock costs at 100 units
2. Total safety stock costs at 200 units