Illustrative Example of a Vendor Allowances Arrangement Presented below is a hyp
ID: 2487705 • 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
Here the Plausible Motivations for Tesco's Management to Include Sales Allowances in Sales Revenues would be as follows.
(1) As the Management has received the Refund from the Purchaser equal to 8% they can pass it on the same to their customers to increase the volume of Sales. As the Gross Margin for Management Bonus was the same so if they passes on the refund received it will not impact the gross margin. it will motivate them to increase the Sales and acheive the Target with ease what they have achieved in the past. As such there is no Increase in the Gross Margin Percentage for Bonus wherre as the Purchase Price has been lowered so they can compete with the markets easily and Sell the Products equivalent to the Sales Made by them in the previous year and still get the bonus.