Illustrative Example of a Vendor Allowances Arrangement Presented below is a hyp
ID: 2487694 • Letter: I
Question
Illustrative Example of a Vendor Allowances Arrangement Presented below is a hypothetical example that illustrates a vendor allowances arrangement. Constent wth aid Cohig and sell chc Tesco routinely negotiates contracts with its vendors for purchasing products at best prices, and passes on the savings to its customers. One such annual contract with CPC, a leading consumer products company was initiated on September 1t 2013. The contract stipulated that Tesco will continue to receive 8 percent refund of the purchase price if it bought at least the same quantity (3.5 billion units) of CPC products as it did in the previous contract period, regularly priced at £2 per unit (total purchases of £7 billion). In addition, depending on the level of purchases during the contract period, the contract stipulated a lower (or higher) refund, as followsExplanation / Answer
The refund on purchase can be viewed as Sales commission also as it increases with the level of increases in sales to Tesco. It is a direct cost to sales for CPC and the expense of 560 million pound is in direct relation to the sales of 3.5 billion pound in the year committed by Tesco.
Therefore , CPC management can recognize the sales allowance as SGA expense as it aids in generating sales.