Want the answer without the arithmetic? Try our free landed cost calculator, which splits costs by value or by units.
The landed cost formula
Landed cost per unit = (supplier cost of the line + that line's share of freight, duty, and fees) ÷ units
Landed cost is everything it took to get a product onto your shelf, not just the price on the supplier's invoice. That usually means freight, import duty, customs broker fees, and any other charges on the shipment.
A worked example
Say one purchase order has two products:
- 200 mugs at $4 each: $800
- 100 candles at $8 each: $800
The goods cost $1,600. Then the extra costs arrive: $240 freight, $96 duty, and a $64 broker fee, so $400 in total. The question is how to split that $400 between mugs and candles.
Two ways to split the extra costs
By value. Each line gets a share of the extra costs in proportion to what it cost. Mugs and candles are each half the order's value, so each takes $200.
Mugs: ($800 + $200) ÷ 200 = $5.00 a unit
Candles: ($800 + $200) ÷ 100 = $10.00 a unit
By units. Every unit takes the same share. $400 ÷ 300 units is about $1.33 a unit.
Mugs: $4 + $1.33 = $5.33 a unit
Candles: $8 + $1.33 = $9.33 a unit
Which method should you use?
Splitting by value suits costs that grow with the value of the goods, like duty, which is often charged as a percentage of value. Splitting by units suits costs driven by how much physical stuff you shipped, when your products are similar in size. If products differ a lot in size or weight, weight is the fairest basis for freight.
Whichever you pick, use it consistently, so your costs are comparable from one order to the next.
Why it matters for your margins
If you sell the mug for $12, the invoice price makes your margin look like 67%. On a $5.00 landed cost, it's about 58%. That gap is money you'd otherwise think you had, and it changes which products are really worth reordering.
Tips
- Add costs when you know them. Freight and duty invoices often arrive after the goods do.
- If only part of an order arrives, spread the costs over what actually arrived, not what you ordered.
- Check the Incoterms on your supplier's quote. Under DDP, freight and duty are already in the price; under FOB or EXW, they're yours to add.
- Use landed cost, not invoice cost, when you work out cost of goods sold and average cost.
How Posto helps
Add freight, duty, and fees to a purchase order and Posto spreads them across its lines, by value or by units, to give a landed cost per unit. You can add costs after the goods arrive. While deliveries are still coming, costs are split over what you ordered, and once the order is finished, over what actually arrived. If you'd like, Posto can also update Shopify's cost per item with the landed cost when stock arrives, so your margin reports in Shopify come out right. It's off until you turn it on, and fees added after receiving don't change a cost per item that's already been set.