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Landed Cost: Definition & Calculation

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this lesson, you'll learn the importance of landed cost when it comes to doing business on an international scale, especially when shipping items across continents and countries.

What is Landed Cost?

The business world has changed so much in recent years. The internet has turned a previously local activity into an international one. Before, if you wanted to purchase something, you were pretty much limited to what your local stores carried. Now, you can get on the internet and purchase almost anything from almost anywhere. You can purchase boots from China or a sheepskin bag from Australia.

Businesses can now also easily create relationships with vendors in other countries so that they can purchase materials and supplies from them. When these international transactions are done either by individuals or businesses, the landed cost becomes important. The landed cost is the cost of the item plus all shipping costs related to getting the item from the seller to the buyer. These shipping costs include things such as customs, taxes, currency conversion, crating, insurance, and transportation costs (ocean transport, for example).

Landed cost includes both the purchase price of the item as well as all shipping costs
landed cost

Why It's Important

Why is the landed cost so important when it comes to these international transactions?

It's mostly businesses that need to use landed cost when making purchasing decisions. See, if several different companies in different countries make similar items for roughly the same price, the landed cost will determine which company is the best to choose from. If a business didn't look at the landed cost, then it would seem that any company would work since they are all charging the same price.

For example, say a stationery company is looking to purchase specialty paper made out of wool. The company is looking at two different companies that sell this product. Both companies sell the specialty paper for the same price of $20.00 per case of 5,000 sheets. One company is located in New Zealand, and the other is located in Australia.

The landed cost becomes important to this stationery company because the cost per sheet of the paper is used to determine how much to price its stationery products made with this specialty paper. If the company didn't use the landed cost, it might end up charging too little for each product because it didn't take into consideration that it also costs money to have this specialty product shipped over.

The Formula

So, how do you calculate the landed cost of an item?

Use this basic formula.

  • Landed cost = Purchase price + ALL shipping costs

This is a basic formula, as it doesn't tell you just what your shipping costs are. That is something each business needs to figure out for each purchasing decision. For example, one product may only have freight costs since all that is needed is a local delivery truck, while another product may have both freight and ocean charges since the product needs to be shipped across the ocean by boat and then delivered to the final destination by truck. Additionally, if the product is from a different country, the business may also have to consider customs and import fees.

Example

Let's take a look at calculating the total landed cost for the specialty paper from New Zealand.

The purchase price of the specialty paper is $20.00 for 5,000 sheets. If the stationery company is located in New South Wales, Australia, then to get the paper from New Zealand, it will have to pay for shipping costs and customs fees. The typical customs cost is 5 percent and shipping across the ocean averages $5 for every $20.00 case.

So, if the stationary company purchases 100 cases at $20.00 each, the total landed cost then will be this.

  • Purchase price = 100 * $20.00 = $2,000.00
  • Customs = $2,000 * 0.05 = $100
  • Shipping = 100 * $5 = $500
  • Total landed cost = $2,000 + $100 + $500 = $2,600

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