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Acct 5201 MAcc Case #9: Revenue For Class Presentation by Team #9 on Tuesday 10/17/17 ThruPut Inc. assists clients by designing and implementing solutions that reduce the overall costs of its customers' supply chains. ThruPut provides Just-In-Time (JIT) inventory management of spare parts used in its customers' manufacturing processes to reduce cycle times and lower inventory-related costs. ThruPut entered into a supply management contract (the \"Agreement\") with Tucci Partners (the \"Customer\"), an unrelated third party, to provide spare parts, management services, including sourcing, procurement, repair, transport, and delivery, and warehouse management. The key terms of the agreement are as follows: Purchase Process A Customer provides ThruPut with a plan at the beginning of the year with a forecast of spare parts that it needs as part of its manufacturing process. On the basis of this plan, ThruPut purchases spare parts from third-party vendors and ships the spare parts directly to the Customer's location. The Agreement states that the Customer determines the product and service specifications and that no changes or modifications can occur without the Customer's consent. ThruPut purchases spare parts directly from vendors. Note that although ThruPut purchased the spare parts according to the plan, the Customer is not obligated or committed to purchase these spare parts. ThruPut directly purchases from third-party vendors; the Customer is not involved in the purchasing process. Vendors name ThruPut in their invoices; the Customer is not named in the invoice. ThruPut is responsible for all payments to its vendors in purchasing the spare parts. When space parts are purchased by ThruPut, the vendor ships the spare parts directly to the Customer's warehouse; however, the Customer does not purchase and obtain title to the spare parts in its warehouse until it issues a purchase order (P.O.) to the ThruPut. At this point, the title of the inventory for which a P.O. has been authorized transfers from the ThruPut to the Customer. ThruPut is responsible for the quality of the product sold to the Customer, who has the right to return any defective product to ThruPut. Purchase of spare parts by ThruPut is generally made in advance of receiving a P.O. from the Customer, and ThruPut is obligated to pay the vendors within the agreed-upon payment terms irrespective of whether the spare parts are sold to the Customer or payment is collected from the Customer. ThruPut has latitude in vendor selection and negotiates pricing with its vendors. ThruPut sets the price it charges the Customer on the basis of ThruPut's cost plus a predetermined mark-up. If ThruPut is able to achieve certain cost savings for the Customer (on the basis of its ability to negotiate pricing with its vendors), it is entitled to bonus payments that are based on a percentage of such savings. Therefore, the better ThruPut does in negotiating savings for the Customer, the greater the margin it earns on each sale. Spare parts inventory that is not purchased by the Customer as part of the P.O. process (because parts are obsolete or requirements have changed) remain the property of ThruPut. If ThruPut is not able to sell the inventory to other parties, the Customer will reimburse ThruPut for 50 percent of the cost of the unsold parts. Warehouse Operations The spare parts are held in the Customer's warehouse, allowing immediate access to the spare parts, which avoids the cost of storage for ThruPut. Although inventory is held in the Customer's warehouse, risk of loss or damage remains with ThruPut, and insurance is paid for by ThruPut. ThruPut has dedicated employees stationed at each Customer's warehouse. These employees handle the day-to-day issues with spare parts received into the warehouse. ThruPut's and Customer's inventory systems are interfaced, allowing ThruPut to monitor stock levels. Shipping Terms As noted above, the spare parts are shipped directly from the vendors to the Customer's warehouse. ThruPut retains title and risk of loss during shipping and at the Customer's warehouse until a P.O. is issued by the Customer to purchase the spare parts. After the Customer issues the P.O., the title transfers, and ThruPut recognizes revenue. ThruPut Fee ThruPut receives 5.5 percent as a \"consumption fee\" for spare parts that are consumed (i.e., purchased) by the Customer from the warehouse. In addition, as noted above, ThruPut earns other fees according to its ability to negotiate favorable pricing on the spare parts. Required: How should ThruPut report revenue related to this arrangement