 Optimal advance payment scheme involving fixed per-payment costsAlex X. Zhang Omega, 1996, vol. 24, issue 5, 577-582 Abstract: The advance payment scheme is used when a payment larger than the billed amount is made. The extra payment is effectively a cash deposit for credit towards bills in future periods. This study presents a model for determining the optimal cash deposit amount when there is a fixed per-payment cost; the model balances the tradeoff between the fixed payment cost with the lost interest on the cash deposit. We use a renewal theory approach to obtain the long-term expected total cost per period when the bill amounts in a future period are deterministic, exponentially distributed, normally distributed, or Poisson occurrence based with a constant per occurrence charge. For the first two cases, we obtain explicit expressions for the optimal deposit amount; for the latter two, we give numerical procedures. An example in each case is presented, along with a comparison with the usual pay-each-period strategy. We conclude that the advance payment strategy offers significant cost savings when the per-payment cost is relatively large compared with the lost interest of one period's average bill amount; i.e. when interest rate is low or the average bill amount is small. Keywords: cost; models; deposit; policy; inventory; theory; application (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jomega:v:24:y:1996:i:5:p:577-582 Ordering information: This journal article can be ordered from Access Statistics for this article Omega is currently edited by B. Lev More articles in Omega from Elsevier |
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