How to Maximize Profits with Landed Cost Calculations
What is Landed Cost?
Landed Cost is the total price of a product from the factory floor to your door. It includes the cost of the item, packing, shipping, duties and taxes, insurance, handling fees and delivery cost.
Benefits of Landed Cost Calculations
Landed cost calculations are both a planning tool and a financial analysis tool. When planning, it’s essential to know the total estimated costs of an item to assess whether it can be profitably sold. If there is more than one sourcing option, landed cost calculations are the method to determine which option is most cost effective. For example, it’s the best tool to compare domestically sourced product with items made overseas or in Mexico. After an item has been purchased, the actual landed costs can be calculated and compared to estimate to highlight any unanticipated expenses impacting profitability. The actual landed cost can also help pinpoint savings opportunities.
How is Landed Cost Calculated?
Landed Cost = item cost + origin charged + freight + duty and taxes + insurance + delivery costs.
Here is an example:
Suppose you are evaluating whether to import some widgets from China and have received a quote from the manufacturer for $0.50 each. You’ve decided to buy in container load quantities, and have been told that 10,000 widgets fit in the container. The origin, ocean and insurance costs are $2000 per container. The duty rate is 5%. Delivery and local handling fees quoted to you are $575.
Cost calculation for example:
Item cost $0.50 per unit
Ocean freight: $2000/10,000 = $0.20 per unit
Duty & Taxes: 5% x $0.50 = $0.025 per unit
Delivery/handling: $575/10,000 = $0.0575 per unit
Landed Cost estimate for the widgets is $ 0.07825 per unit.
Once completed the landed cost estimate can be used to determine whether the item can be sold profitably, and to compare alternative product sources.