Question

Total Landed Cost is a term used to describe the “hidden costs” impact on total cost as an attempt to show purchasers that it´s important to consider the whole offer, not just the “visible costs”. Examples on factors that impacts the “hidden costs” are:

Batch size

Scrap rate

Payment terms

a.How does the batch size impact Total Landed Costs? Motivate the answer.

b.How does the scrap rate impact Total Landed Costs? Motivate the answer.

c.How does the payment terms impact Total Landed Costs? Motivate your answer.

Also, give an example that illustrates Total landed cost.

Answer 1

Total landed cost involves sum of all costs incurred till the item is delivered on the doorsteps of the buyer. Besides purchase cost it might include shipping cost, transportation cost, handling cost, inventory, taxing, insurance and any other costs tha might add up to the total cost.

1. Batch size affects the total landed cost in different ways. the total cost of handling with bigger batches is lower, due to lesser number or orders, therefore less cost of handling and transportation charges and economy of scale while transporting the goods. Big batch size might also get concession from the seller and transporter. However, the bigger batch size might incur higher cost of insurance as well as holding charges.

2. Scrap rate increases the total landed cost due to higher part of items that don't add value to the customer, and don't fetch money. Higher scrap value reduces profits for the seller, who most often bears the cost of scrap.

3.Payment terms might affect the total landed costs. Cash terms attract better deals than credit terms which also add to landed costs in form of interests, levies and taxes on interest among other hidden charges.

The total landed cost example.

The ABC industries purchases electronic goods from the China. The annual demand per year is 2500.Cost of purchase is $12 per unit and the cost of holding per unit per year is $2. Insurance is $0.1 per unit. The company offers the item for $11.5 per unit if the order size is between 600-1499 units. The cost per unit is $11 if the order sie is above 1500 units. The ordering cost is $50 per order irrespective of size. Interest is charged at the rate of 1.5% per month, if payment is not made at the time of delivery. The government levies 5% tax on interest value paid. Loading / Unloading team charges $30 per order irrespective of size.

Landed cost includes-

(i) Cost of purchase ( varies according to the order size)

(ii) Cost of ordering

(iii) Cost of insurance

(iv) Cost of interest

(v) Cost of levy on interest

(vi) Loading / Unloading charges.