Question

How do we arrive at the "Net Delivered Cost of Purchase? "What is an "allowance"and why would a merchant offer your one?is the allowance a negotiable position for the buyer?can you negotiate an allowance to your favor and how would youdo so?

Answer 1

Net Delivered Cost of Purchase is calculated as follow;

Net Delivered Cost of Purchase = (Purchases + Freight In cost – Purchases Returns and Allowances – Purchases Discounts)

So it is clear that we need to add amount of purchase and amount of freight in and have to deduct purchases allowance and purchases discount.

Purchases Allowances and why it is offered;

Purchase allowances is an allowance given by the supplier & seller to the buyers with respect of damages, faults and defects etc. This amount is relaxation for the buyers which helps in managing losses of inventories purcahsed due to damages, faults and defects etc. Thus it is offered by the suppliers to protect their buyers from some losses due to damages, faults and defects etc.

Is the allowance a negotiable position for the buyer?

Yes, it is a negotiable position for the buyers because always buyers want a significant amount of allowance so that they can be protected from some unforeseen losses of materials purchased. As we know that materials purchased can be faulty, defected etc. thus due to such losses all buyers will want significant amount of protection from the seller & suppliers. Practically we see that buyer try to get sufficient allowance from the suppliers and buyers keeps their terms in front of suppliers so that suppliers can make a proper provision of such allowances. Buyers make a proper list of suppliers & their terms of allowances then they approach each suppliers to get maximum allowance amount for covering some types of losses. Hence it is clear that buyers are in negotiable position and they negotiate for an allowance to their favor also.