Landed cost formula: what one imported unit really costs

What goes into landed cost

• Product cost: the supplier invoice, here 2,400 units × $6.50 FOB = $15,600. FOB means the supplier pays until the goods are loaded at the port of export, and the buyer pays from there.
• Freight and insurance from the port of export to the port of import: $2,150 and $55.
• Import duty: the tariff rate for the product's HS code times the customs value, here 6.5%.
• Other import costs: customs broker fee, port and terminal handling, inland trucking to your warehouse, and any other government fees: $185, $340 and $420.

Which of these you pay depends on the Incoterm. On EXW you also pay export clearance and transport to the port, on DDP the supplier pays nearly everything and builds it into the price. Compare quotes on different Incoterms only after adding the costs that each one leaves to you.

Step 1: the customs value and the duty

Duty is charged on the customs value, and countries define it differently. Most, including the EU, the UK and many others, use the CIF value: product cost plus freight and insurance to the border, here $15,600 + $2,150 + $55 = $17,805, so 6.5% duty is $1,157.33. The United States and a few others use the FOB transaction value, without international freight and insurance, which would give $1,014.00. Duty can also be specific (a fixed amount per kg or per unit) or compound (both), so look up the rate and the basis for your HS code with your customs authority or broker.

Step 2: add the other costs and divide by the units

Total landed cost is the customs value plus the duty plus the other import costs: $17,805 + $1,157.33 + $185 + $340 + $420 = $19,907.33. Divide by the units you actually received, 2,400, to get $8.2947 per unit. If some units arrive damaged and cannot be sold or claimed back, divide by the good units only, because the sellable units carry the whole cost. In Excel each cost line gets a per-unit column with =B4/$B$2, so you can see which line drives the result. Here freight adds $0.90 a unit and duty $0.48.

Worked example: 2,400 ceramic mugs, CIF-basis duty

Yellow cells are inputs from the supplier invoice, the freight quote and the broker. Column B holds the shipment amounts, column C the cost per unit. Amounts in USD.

Worked example: 2,400 ceramic mugs, CIF-basis duty

	A	B	C
1	Item	Shipment ($)	Per unit ($)
2	Units received	2,400
3	Product cost (FOB)	15,600.00	6.50
4	Ocean freight	2,150.00	0.8958
5	Cargo insurance	55.00	0.0229
6	Customs value (CIF)	17,805.00	7.4188
7	Duty rate (on CIF value)	6.5%
8	Import duty	1,157.33	0.4822
9	Customs broker fee	185.00	0.0771
10	Port and terminal handling	340.00	0.1417
11	Inland trucking to warehouse	420.00	0.1750
12	Total landed cost	19,907.33	8.2947
13
14	Landed cost vs FOB cost		27.6%
15	Wholesale price per unit		12.00
16	Margin on FOB cost		45.8%
17	Margin on landed cost		30.9%
18
19	Import VAT rate (reclaimable)	20%
20	Import VAT on CIF + duty, not in landed cost	3,792.47
21	Cash due at the border, duty + VAT	4,949.79
22	Duty if the country uses the FOB value (e.g. US)	1,014.00

Illustrative duty and VAT rates and fees, not a tariff schedule. Customs value rules, duty rates and VAT reclaim rules differ by country and product. Check them with your customs authority or broker. Not legal or tax advice.

Why import VAT or GST is usually left out

Many countries charge import VAT or GST at the border, on the customs value plus the duty. At 20% that is ($17,805 + $1,157.33) × 20% = $3,792.47. A VAT-registered importer reclaims it in the next VAT return, so it is not a cost of the goods and stays out of landed cost. It still has to be paid, together with the duty, before the goods are released: $4,949.79 of cash in the example, unless the country allows postponed accounting. If you cannot reclaim the VAT, for example as a private buyer or a business that is not registered, it does belong in the cost. The US has no federal import VAT, and sales tax is charged later, on the sale.

Landed cost and margin

Pricing from the supplier price is the most expensive habit in importing. At a $12.00 wholesale price the mug seems to make (12.00 − 6.50) ÷ 12.00 = 45.8%. On landed cost the margin is (12.00 − 8.29) ÷ 12.00 = 30.9%. Cheap, bulky or high-duty products suffer most, because freight and duty are large relative to the product price. Set prices from landed cost with the markup vs margin formulas, and use the landed cost per unit, not the FOB price, as the unit cost in a break-even analysis.

Shipments with several products

When one container carries several SKUs, freight, insurance and fees are shared costs. Allocate them by weight or volume when space or weight drives the freight bill, by value when the cost depends on value, as insurance and ad valorem duty do, or by units when the products are similar. Duty is calculated per product line at its own rate. The allocation method can move the landed cost of a light, cheap item by a large percentage, so pick the one that matches how the cost really arises and use it consistently.

Common mistakes

• Pricing from the FOB price. The example product looks like a 45.8% margin and earns 30.9%.
• Using the wrong duty base. CIF and FOB bases give different duty: $1,157.33 against $1,014.00 here. Check which one your country uses.
• Adding reclaimable import VAT to the cost. If you get it back in your VAT return it is cash flow, not cost. If you cannot reclaim it, it is a cost.
• Forgetting the small fees. Broker, port, terminal and inland transport add $0.39 per unit here, nearly as much as the $0.48 of duty.
• Dividing by units ordered. Short-shipped or damaged units that you cannot sell or claim raise the cost of the units you have. Divide by units received in good condition.
• Comparing quotes on different Incoterms. An EXW quote looks cheaper than a CIF quote until you add export clearance and the main freight.