Question

1) based on the text  What does the text imply is the positive return from "investing" in accounts receivables?

As is true of other current assets, accounts receivable should be thought of as an investment. The level of accounts receivable should not be judged too high or too low based on historical standards of industry norms, but rather the test should be whether the level of return we are able to earn from this asset equals or exceeds the potential gain from other investments. For example, if we allow our customers five extra days to clear their accounts, our accounts receivable balance will increase—draining funds from marketable securities and perhaps drawing down the inventory level. We must ask whether we are optimizing our return, in light of appropriate risk and liquidity considerations

2) Of the four explicit carrying costs, which wouldn't be linear? Also explain how that one could be linear over specific order size ranges.

Carrying costs include interest on funds tied up in inventory and the costs of warehouse space, insurance premiums, and material handling expenses. There is also an implicit cost associated with the dangers of obsolescence or perishability and rapid price change. The larger the order we place, the greater the average inventory we will have on hand, and the higher the carrying costs.

Answer 1

1) based on the text  What does the text imply is the positive return from "investing" in accounts receivables?

if the funds are not invested in account receivable, it could be utlised in deposit with banks or fixed return etc. As the aim of business unit is to maximise the return, the investment into account receivable is advisable if the return exceeds the alternative return. So when you provide extra days or provide credit to customer, whether it results into additional return which exceeds the alternative return in such case it would be treated as positive return

2) Of the four explicit carrying costs, which wouldn't be linear? Also explain how that one could be linear over specific order size ranges.

Interest on funds, warehousing cost & insurance premium would not be linear since the such one would incurr such cost in specific quantum and hence may not appear linear. e.g. If ware house space is to store 10,000 kg and if there is shortage of space one would go with another 2500 KG or 5000KG space even though additional 1000 KG space is needed since the exact size may not be available also one would not warrant frequent changes. Similarly this apply to insurance premium and interest on funds as well to some extent.

These costs could be linear if the size changes coincide with additional fit size for such cost e.g. If there is additional requirement of 5000KG and space is taken for 5000 KG the warehouseing cost can be linear.