Landed Cost: Meaning, Calculation, and Examples for Importing
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1. What does Landed Cost mean?
2. How to Calculate Landed Cost
Understanding the landed cost of imported goods is crucial for any business involved in international trade. This article will explain what landed cost is, why it's important, and show you how to calculate it with an example.
1. What does Landed Cost mean?
Landed cost is the total expense of getting a product from the supplier to your business location. It encompasses the product price, shipping costs, customs duties, taxes, and any additional fees incurred along the supply chain. Essentially, it's the sum of all costs involved in making the product available for sale. When suppliers quote a DDP (Delivered Duty Paid) price, they are providing the landed cost.
Understanding the landed cost is important because it helps you set accurate product selling prices and improve profit margins. It helps you find ways to save money when importing and exporting, reducing the chance of losing money.
2. How to Calculate Landed Cost
The formula for calculating landed cost is:
Landed Cost = Product Price + Shipping Costs + Customs Clearance Fees + Overhead Fees
Let’s break down each component using an example. Suppose you import 5 cubic meters (CBM) of cargo from the Port of Ningbo to the Port of New York. The cargo, consisting of 1,000 units at $10 each, weighs 750 kg.
Product Price
The product price is the cost paid to the supplier, including raw materials, processing, and packaging.
Product Price = 1,000 units x $10/unit = $10,000
Shipping Costs
Shipping costs include transportation from the supplier's warehouse to your destination. This involves several stages:
a. Factory to Port of Ningbo: $90 for 5 CBM cargo.
b. LCL Sea Shipping from Ningbo to New York:
- Sea freight: $75/CBM
- Port fees: $150
- Total: $75 x 5 CBM + $150 = $525
c. New York Port to Warehouse:
- DIM weight = 5 CBM x 200 = 1,000 kg (used because it's greater than the actual weight of 750 kg)
- Rate: $6.5/kg
- Total: $6.5 x 1,000 kg = $650
Total Shipping Costs = $90 + $525 + $650 = $1,265
Customs Clearance Fees
It mainly includes the fees generated in the clearance process, which always come in 3 types.
a. Customs declaration fee
Each customs form determines the fee, not the shipment value. Allocate a set amount for each form.
A declaration fee is a must whether in export or import. That is to say, you need to pay an export declaration fee in China.
That costs nearly $21. When the cargo arrives in the US, you also need to pay a clearance declaration fee. That requires $100-200.
Suppose the total customs declaration fee is $150 in this example.
b. Duties and taxes
You must pay import duties and taxes as required by the importing country's regulations.
Duties relate to the type and value of cargo. In the US, any imported goods with a value of $800 or more are subject to import duties. Suppose the import duty rate is 6% here. Then,
Import duties = import duty rate x value of goods = 6% x $10,000 = $600
As one of the tax types, VAT relates to the cargo’s HS code and policies in different countries. Note the US doesn’t levy VAT on imported goods. But there exist the following 3 kinds of taxes.
· Merchandise Processing Fee (MPF) -- calculated by 0.3464% of shipment value and not less than $27.2.
· Harbor Maintenance Fee (HMF) -- calculated by 0.125% of shipment value.
· Federal excise tax -- only for particular items like alcohol, tobacco, etc.
Here in the example, you need to pay:
· MPF = 0.3464% x $10,000 = $34.64
· HMF = 0.125% x $10,000 = $12.5
In this context, the total duties and taxes = $600 + $34.64 + $12.5 = $647.14.
c. Agency Fees
- Customs broker fee (1% of $10,000): $100
Total Customs Clearance Fees = $150 + $647.14 + $100 = $897.14
Overhead Fees
These include payment processing fees, bank charges, and exchange rates.
Overhead Fees: $45
Total Landed Cost
Adding all these components together, we get:
Total Landed Cost = $10,000 (Product Price) + $1,265 (Shipping Costs) + $897.14 (Customs Clearance Fees) + $45 (Overhead Fees) = $12,207.14
Lowering your landed cost can significantly boost your profit margins. Here are some strategies:
Reduce Shipping Costs
Choose trade terms like FOB, CIF, or DDP to leverage supplier arrangements with freight forwarders. Different shipping methods and efficient packaging can also lower costs. Sea freight is typically cheaper, though slower.
Negotiate Product Prices
Understand market prices and negotiate with suppliers for better rates. Large order volumes and favorable payment terms can help secure discounts.
Optimize Customs and Overhead Fees
Work with experienced customs brokers and use cost-effective payment methods to minimize additional fees.
The FOB (Free on Board) price is a component of the landed cost. It includes the product price, shipping from the factory to the departure port, and export declaration fees. Under FOB terms, you handle costs from the departure port onwards, including international shipping, import duties, and local transportation.
Knowing how to calculate the landed cost is crucial for any business involved in importing and exporting. It ensures you have a clear picture of all expenses and helps optimize your supply chain for better profitability. If you have any questions, feel free to comment below.
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