Landed cost: what an item really costs you
A supplier quotes you $4.00 a unit. You sell the item at $6.00 and think you make $2.00. Then the freight bill arrives, and the customs paperwork, and someone's afternoon spent unloading. Your $2.00 starts to look thinner.
Landed cost is the honest figure: everything it cost to get the item onto your shelf, spread over the units you received. It is the number your margin should be based on.
The formula
$1,600
Goods
400 x $4.00
$120
Freight
$80
Duties
$40
Handling
$1,840
Total cost
Divide the total by the units received: $1,840 / 400 = $4.60 per unit.
Add the goods, freight, duties and any other cost of getting them in, then divide by the number of units that arrived. In the example, the $4.00 item really costs $4.60, and your $2.00 margin is $1.40.
- Goods87%
- Freight7%
- Duties4%
- Handling2%
Average cost per unit
Costs change from one delivery to the next. When you hold stock bought at different prices, the average cost blends them.
On hand: 100 units at $4.60 = $460.
New delivery: 200 units at $5.00 = $1,000.
Average cost = (460 + 1,000) / 300 = $4.87 per unit.
It is not an average of 4.60 and 5.00. It is weighted by how many units each price covers, which is why the answer sits closer to $5.00.
Why it matters
- Your real margin. Pricing from the invoice price alone makes you think you earn more than you do.
- Supplier comparisons. A cheaper supplier with expensive freight can lose to a dearer one who delivers free.
- Stock value. Anything you total up for the books should use cost that reflects what you paid to get it.
- Decisions about order size. A big order can spread a fixed freight bill over more units.
Cost per unit
Invoice price
$4.00
Landed cost
$4.60
Margin on a $6.00 sale
Invoice price
$2.00 (33%)
Landed cost
$1.40 (23%)
It looks like
Invoice price
A bargain
Landed cost
The real price
| Invoice price | Landed cost | |
|---|---|---|
| Cost per unit | $4.00 | $4.60 |
| Margin on a $6.00 sale | $2.00 (33%) | $1.40 (23%) |
| It looks like | A bargain | The real price |
What to include, and what not to
Include costs you can tie to a specific delivery: freight, customs, insurance, and handling charges. Leave out general overheads such as rent and wages, which are real but belong in a different calculation. Your accountant has the final say on what counts for the books.