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Terms of Sale
Annualized opportunity cost of
foregoing a discount:
Accounts Receivable
Management
Terms of Sale
Annualized opportunity cost of
foregoing a discount:
a 360
x
1-a c - b
Accounts Receivable Management
Accounts Receivable Management
a 360
x
1-a c - b
Accounts Receivable Management
a 360
x
1-a c - b
a 360
x
1-a c - b
.03 360
x
1 - .03 60 - 30
Accounts Receivable Management
a 360
x
1-a c - b
.03 360
x
1 - .03 60 - 30
= 37.11%
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:
Inventory Management
Optimal inventory order size: the
Economic Order Quantity (EOQ)
model:
2SO
Q* =
C
Inventory Management
Q* = 2SO
C
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
Example: Inventory Management
Q* = 2SO
C
Q = inventory order size in units
C = cost of carrying 1 unit in inventory = 1.25
S = total demand in units over planning
period = 10,000 units
O = ordering cost per order = $250
Example: Inventory Management
Example: Inventory Management
2SO
Q* =
C
Example: Inventory Management
2SO
Q* =
C
Q* = 2x250x10,000
1.25
Example: Inventory Management
2SO
Q* =
C
Q* = 2x250x10,000
1.25
= 2,000 units
Order Point Problem
Average EOQ
= + safety stock
inventory 2