To: Elena Zajac, VP of Operations
From: Raajat Gupta, CPA, CA; Percil Parikh, CPA, CA
Re: Spark Plug Purchases and Supplier Recommendations for Allure Canada
Key Facts: A Japanese car manufacturer, Allure has built a reputation for safety and quality, rarely requiring repair within the first five years and in use for often over ten years. Allure Canada continued on this reputation, with the help of Allure Japan, who provided the four spark plugs necessary per car until December 15, 20X2, when their manufacturing plant was destroyed in an earthquake.
Objectives: With little to no prior experience purchasing spark plugs of their own due to Allure Japan’s provision of all necessary spark plugs until now, we will be assisting Allure Canada in (1) identifying the amount of spark plugs they will need to purchase as well as (2) selecting a supplier for their spark plugs for the next year.
Constraints: There is one constraint to keep in mind when budgeting for future spark plugs: Allure Japan typically shipped enough spark plugs to Canada monthly to ensure 50% of next month’s demand could be met, and to assert their own capabilities and competence, it is advised that Allure Canada continue this policy in the absence of Allure Japan. Since the company has been successful in Canada since 1981, we also assume Allure Canada currently faces no financial crises that would result in financial constraints.
Objective 1: Monthly Amounts of Spark Plugs to Purchase (Appendix I)
Determining the monthly amounts of spark plugs to purchase is relatively straightforward, as laid out in the purchases budget in Appendix I, with a summary provided to the right.
The average number of spark plugs to purchase in each month is 24467, a total of 293600 will need to be purchased for each month, and the entire budget adheres to Allure Japan’s policy of maintaining an ending inventory equivalent to 50% of the next month’s needs, with the only exception being in December, both because January 20X3’s estimated car sales are unknown, and because it is assumed that by that point, Allure Japan will be able to provide the necessary spark plugs to meet the demand for January 20X3 onwards. Regarding timing of purchases, all purchases will be made one month prior to when they are needed because Walks Automotive takes 30 days to deliver (meaning they will deliver by the time the spark plugs are needed) and Sparks Inc. takes approximately 15 days (meaning it is best to purchase in advance to be safe). This cautionary measure is reflected in the following rudimentary cash disbursement budgets.
Objective 2: Selection of Supplier to Purchase Spark Plugs from
Financial Considerations (Appendices II, III, IV):
Walks Automotive and Sparks Inc. have both offered to step in immediately, which is a huge boon to Allure, but their payment terms and schedules are drastically different and they both present distinct advantages and drawbacks when considering them purely from a financial perspective
Walks Automotive makes deliveries 30 days after an order is placed, and orders are placed so amounts that are needed for a month are delivered by the last day of the preceding month (see Appendix II purchase schedule). As a result, no payments are made in December of 20X2 or 20X3, with average payments per month being $564,389.54 and average payment per month excluding both Decembers being $667,005.82, which are both fairly high prices to pay. Additionally, the inflexibility in payment terms (all payments must be made upon delivery) means that if Allure Canada is ever short on cash, they would have difficulty meeting the strict payment schedule of Walks.
On the other hand, Sparks Inc. makes deliveries approximately 15 days after an order is placed, and once again the purchase schedule was made so that amounts needed for a month
