The company Apple Juice Inc.

The company Apple & Juice Inc. (ANJ) 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.

ANJ entered into a supply management contract (the "Contract") with Overland Auto Inc. (the

"Customer") to provide spare parts management services, which include sourcing, procurement,

delivery, and warehouse management.

The key terms of the Contract are as follows:

Purchase Process

At the beginning of the year, the Customer provides ANJ with a projection of spare parts

forecast of its manufacturing process. According to the projection, ANJ purchases spare parts

from third‐party vendors and ships the spare parts directly to the Customer's location. The

Contract stipulates that the Customer dictates the product and service specifications and that

no changes or modifications can occur without the Customer's consent. ANJ purchases spare

parts directly from vendors. Though ANJ purchased the spare parts according to the projection,

the Customer is not obligated or committed to purchase these spare parts.

ANJ purchases spare parts directly from third‐party vendors. ANJ is responsible for all

payments to its vendors in purchasing the spare parts. Vendors name ANJin their invoices.

Also, when spare parts are purchased by ANJ, 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 ANJ. At this point, the title of the

inventory for which a P.O. has been authorized transfers from ANJto the Customer.

 ANJ is responsible for the quality of the product sold to the Customer, who has the right to

return any defective product to ANJ.

 Purchase of spare parts by ANJ is generally made in advance of receiving a P.O. from the

Customer, and ANJ 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.

ANJ has latitude in vendor selection and negotiates pricing with its vendors. ANJ sets the price

it charges the Customer on the basis of ANJ cost plus a predetermined mark‐up. If ANJ 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 ANJ 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 ANJ . If the

ANJ is not able to sell the inventory to other parties, the Customer will reimburse ANJ for 40

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 ANJ .

 Although inventory is held in the Customer's warehouse, risk of loss or damage remains with the

ANJ , and insurance is paid for by ANJ .

 ANJ has dedicated employees stationed at each Customer's warehouse. These employees

handle the day‐to‐day issues with spare parts received into the warehouse.

 ANJ and Customer's inventory systems are interfaced, allowing ANJ to monitor stock levels.

Shipping Terms

 As noted above, the spare parts are shipped directly from the vendors to the Customer's

warehouse. ANJ 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 ANJ recognizes revenue.

ANJ Fee

 ANJ receives 6 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, ANJ earns other

fees according to its ability to negotiate favorable pricing on the spare parts.

Required:

How should the ANJ report revenue related to this arrangement?