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Landed Cost
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The landed cost refers to the price of a product to subsidiary/distributor when it arrives at the point of entry to their distribution territory. The landed cost price is also used for determining the cost of sales and sales price of the subsidiary/distributor. The ability to source products from around the world offers businesses opportunities to reduce costs and increase product availability, potentially resulting in strategic and profitability gains.  However, the opportunity also brings the challenge of accurately calculating true cost and profitability analysis. Landed cost is the process of capturing all costs associated with the acquisition of goods, enabling businesses to accurately calculate inventory valuation by including these associated costs, whether the costs are known at the time of receipt of the goods, or sometime after.

Product cost + Shipping + Customs + Risk + Overhead   = Total Landed Cost

To calculate the landed cost, or true cost of a product, the associated costs are added to the cost of the product, including:

Shipping: Costs associated with crating, packing, handling, and freight.

Customs: Duties, taxes, tariffs, VAT, broker’s fees, harbor fees

Risk: Insurance, compliance, quality, safety stock costs

Overhead: Purchasing staff, due diligence cost, travel, exchange rates

Landed cost: Importance in decision making

Nearly everyone uses a version of landed costing in their daily lives.  For instance, if you need a new refrigerator, you will probably do a bit of shopping around before you make your purchase.  The one from the big box store 40 miles away may be $50 less than the one from the appliance store down the street, but when you add in the delivery charge of $100, it may end up being cheaper to buy the higher priced one that is nearby with free delivery. So, one would assume businesses, when sourcing  a product from potential manufacturers or distributors from around the world would compare the true or total landed cost prior to making purchasing decisions.  Without understanding of the total landed cost, it is nearly impossible to make informed decisions on productsourcing and profitability.


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