Ch

7 Formula Sheet

EOQ:

S= Sales (or usage) in UNITS**

O= Ordering cost (in dollars) PER ORDER

CC= Carrying Cost (in dollars) PER UNIT

If in Cents, then use a decimal (50 = .50)

Ordering Cost = # Orders x Cost per order

!"#
Average inventory = !

Carrying Cost = Average Inventory X Unit in CC

Total Inventory Cost = Carrying Cost + Ordering Cost

Reorder point

Step 1 Determine daily usage rate

# UNITS / 360 days = # UNITS / day < selling # amount of UNITS per day

Step 2 Determine shipping time

# days

Step 3 Calculate reorder time

#days (step 2) X # UNITS (Step1) = # UNITS

If the inventory reaches # UNITS (step 3) we must place another order of EOQ
amount



Safety Stock and Stock out

!"#
Average inventory = ! +


!""#$%&' !"#"$%&'("
Average collection period = !"#$%&# !"#$% !"#$%& !"#$!

Terms & Key Ideas

Current Assets Goal: Optimization

One motivate to holding Cash: Keep your banker happy

Cash is non-earning asset. Keep it balance on 0 or neg. Keep your money and
Marketable securities

Float: time that it takes to receive or leaves your account.

Kinds of floats (according to the text)
1. Mail
2. Clearing

Goals of float:
1. Speed up Inflows
2. Slowdown Outflows

Speed up Inflows
1. Discount
2. Charge for late plenty payment
3. Use regional collection center
4. Lockbox service
5. EFT (Electronic Fund Transfer)

Slowdown Outflows
1. Pay with a business credit card (cash back)
2. Pay bills on the last day use checks
3. Write the check to distant banks

5C of credit
Character
Capital
Capacity
Conditions
Collateral
Investigate Tool
Dun & Bradstreet
Altman Z report



Net discount policy

2/10 n/30

this means within 10 days your business will receive 2% discount, but if your
business wait until to pays the full amount your business will receive no discount.

Two types of Inventory Cost


Ordering: Costs involved in ordering, transporting, and receiving inventory

Carrying: Cost involved in warehousing, preserving, guarding, insuring

Total inventory cost is minimized when these two cost are equal.

JIT Just in Time
Reduced expenses for:
Storage space
Manpower that would have been used for handling and accounting for
inventory
Utilities
Quality control
Shrinkage (Theft, breakage, etc)