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Advances in Decision Sciences
Volume 2014 (2014), Article ID 678561, 11 pages
Research Article

Inventory and Credit Decisions under Day-Terms Credit Linked Demand and Allowance for Bad Debts

Department of Operational Research, Faculty of Mathematical Sciences, University of Delhi, Delhi 110007, India

Received 28 July 2014; Accepted 26 October 2014; Published 8 December 2014

Academic Editor: Jen-Chih Yao

Copyright © 2014 K. K. Aggarwal and Arun Kumar Tyagi. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


In order to stimulate demand of their product, firms generally give credit period to their customers. However, selling on credit exposes the firms to the additional dimension of bad debts expense (i.e., customer’s default). Moreover, credit period through its influence on demand becomes a determinant of inventory decisions and inventory sold on credit gets converted to accounts receivable indicating the interaction between the two. Since inventory and credit decisions are interrelated, inventory decisions must be determined jointly with credit decisions. Consequently, in this paper, a mathematical model is developed to determine inventory and credit decisions jointly. The demand rate is assumed to be a logistic function of credit period. The accounts receivable carrying cost along with an explicit consideration of bad debt expense which have been often ignored in previous models are incorporated in the present model. The discounted cash flow approach (DCF) is used to develop the model and the objective is to maximize the present value of the firm’s net profit per unit time. Finally, numerical example and sensitivity analysis have been done to illustrate the effectiveness of the proposed model.