Inventory management and accounts receivable policy

Abstract

The thesis shows, through an alternative development of the deterministic economic production quantity (EPQ) model, how the accounts receivable policy affects the costs of operating the inventory system. By maximizing the present value of profits over the infinite planning horizon, square root fomulae which are the function of accounts receivable period are obtained. The decision variables for accounts receivable policy are the credit option period and the cash discount period. The optimal accounts receivable policy would involve extending trade credit more liberally until the marginal profitability on additional sales equals the required return on the additional investment in inventory. Numerical examples are given to illustrate the effects of trade credit financing on the inventory system.