Calculating Selling Price and Gross Margin

When we speak of gross profit margin, we are describing the difference between the selling price of the item and the cost to place it in inventory. The selling price can be the “ticketed” price or the actual selling price, if the item has been marked down or discounted. The cost of the item is the purchase price plus additional costs to place it in inventory; currency exchange, duties, brokerage fees, shipping and in-transit insurance.

Let’s look at a practical example of an order of 10 units of Widget A, at a unit cost of $12.00, purchased from a supplier in the United States. The goods are shipped by the supplier, with a copy of the vendor’s invoice in US dollars, via FedEx. At the Canadian border port of entry, a customs broker prepares Canadian Customs import forms, converting the value to Canadian currency and calculating the amount of duty if any, and the amount of Harmonized Sales Tax (HST) due. The vendor’s invoice, the Customs Entry form and the FedEx invoice for transportation give us the information to make the “landed cost” calculation:

Calculation of "Landed Cost" - Widget A

No. of Units

Unit Price

Invoice Cost(US)

USD/CAD Rate

Value (CAD)

HST 13%

Widget A

10

12.00

120.00

1.05

126.00

16.38

*

Duty

0.00

Freight

24.00

Brokerage

14.00

Landed Cost

164.00

L/C per Unit

16.40

* HST is a value-added tax, excluded from our cost calculation and claimed

as an Input Tax Credit, deducted from HST collected on sales.

Since our widgets are manufactured in the US, there is no duty under our tariff agreement with the country of origin. HST will be collected on the entry form but not included in landed cost as this will be recovered as an Input Tax Credit, deducted from our remittance of HST collected on sales.

As we can see, widget A no longer costs $12.00. Currency differential, freight and brokerage have increased the cost burden to $16.40. It is this number that forms the base for the calculation of the selling price, based on our desired gross profit margin and price competition.

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