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Product import budget calculation: A case study

By Fredrik Grönkvist

Procurement Budget

Making a Product Import Budget Calculation is the first step before investing in a new venture, or product. However, it’s far from as easy as simple as counting a profit directly on a quoted FOB price.

In this article, we show you what an Import Budget Calculation might actually look like. As costs vary depending on a several factors, such as product, imported quantity, destination and mode of transportation – we have made the following assumptions:

• Product: Wristwatches

• Quantity: 3000 pcs

• Pre-production sample required: Yes

• Transportation: Air freight

• Third party service provider assistance: Essential services only

• Destination: United Kingdom

• Targeted procurement price: $30

• Estimated retail price: $220

 

1. Cost Overview

a. Product Costs

Unit Price

The unit price makes up a majority share of the total procurement budget. In order to obtain a unit price, you must first draft a product specification, which is the basis for your price research. For more guidance on how to manage price research in China, read this article. In this Case Study, we set the unit price at $19.6.

Product Packing

Product Packaging is another cost to take into consideration, when making calculations for an import budget. The product packaging cost varies, depending on the materials and the quantity. However, in this Case Study, we assume a cost of $1.85.

Pre-Production Samples / Tooling Costs

While a product sample, or prototype, is a non-recurring charge, it can still add on significantly to the startup cost of launching a new product. However, as this Case Study is based on Wristwatches, we can assume a relatively low pre-production sample and tooling cost, of $640.

b. Third Party Service Costs

Supplier Sourcing & Due Diligence

Manufacturers in China are not created equal. They all have different track records, qualifications and technical expertise. As explained in this article, there are various ways to assess suppliers in China. You may of course do it yourself, or you may hire an agent or service provider to do so for you. If you choose the latter, there is essentially no maximum amount of money that you can spend on conducting due diligence.

Hence, this may cost you anything from $200, to $2 million – depending on how “sure” you must be. However, in this article, we assume that you’ll be buying a Chinaimportal.com Industry Report, for a total cost of $349.

Quality Inspection

Buying from Chinese manufacturers is a bit like flying with a low cost airline. No extras are included. While many Chinese manufacturers indeed have their own, internal, quality management procedures – you must still pay a third party for an independent quality check on the goods. If you order a Quality Inspection from Sofeast.com, it’ll cost you $299. That also includes travel expenses.

Compliance testing

If you are based in the United States, the European Union or any other developed market, your product may be regulated by one or more product safety standards. Third party laboratory testing may, or may not, be mandatory. Regardless, non-compliance is by definition illegal, so you are strongly recommended to submit a pre-production sample for compliance testing. As this shipment is heading to the United Kingdom, we assume the following tests as necessary:

• REACH: $720

• RoHS: $420

c. Shipping, Duties and Other Taxes

Freight

For the sake of simplicity, we decided to assume that the shipment will be delivered by air freight. The cost of Airfreight is based on the following two factors:

• Weight (Kilograms)

• Volumetric Weight (Cubic meters)

Assuming a weight of 369 kgs, and a price per kilogram set at $5, we can add a cost of $1845, to our import budget.

Freight Insurance

The freight insurance cost usually as low as 0.5% of the freight cost. In this Case Study, that’s not more than $9.5. However, it is of some significance when calculating the Customs duties. As such, we decided it’s worth mentioning.

Import Duties

Customs duties vary depending on the product, and are calculated based on the Customs value – which in turn is based on the total value of Unit price, freight and insurance. This is what’s sometimes referred to as the CIF (Cost Freight Insurance) Price, a commonly used Incoterm. However, the method for calculating the customs value differs, but now the assumed destination is the United Kingdom, which applies the same customs value as the European Union as a whole. As such, we can now calculate the Customs Value as follows:

• Unit Price (Including Packaging): $21.45

• Freight (Per Unit): $0.615

• Freight Insurance (Per Unit): $0.0036

• Total Customs Value: $22.07

The duty rate in the UK, for watches, is currently 4.5%. Hence, we can now calculate an import duty of $0.993. Let’s just say $1, to keep things simple.

Note: The value of the pre-production sample and/or tooling, may be included in the first shipment, or divided on later shipments. However, to not further complicate the calculation, we don’t add this cost.

Note: Importers in the United States and Australia, must only declare a customs value based on the FOB (Free on Board) value, which does not include the freight cost.

Value Added Tax (VAT)

The VAT is also calculated based on the customs value, plus the customs duty. In the UK, the current VAT rate is set at 20%. Hence, we need to add on another $4.6. Click here to read more about VAT, when importing to the United Kingdom, and other EU member states.

Note: VAT is only relevant to buyers in the European Union. Different taxes apply in, for example, the United States and Australia.

 

2. Import Budget Calculation

Cost

Calculation

Sub-Total

a. Product Costs

– Unit Price

$19.6 x 3000 pcs

$58,800

– Product Packaging

$1.85 x 3000 pcs

$5,550

– OEM Sample & Tooling Cost

$640

$640

b. 3rd Party Services

Supplier Sourcing & Due Diligence

$349

$349

Quality Inspection

$299

$299

Compliance testing

$720 + $420

$1,170

c. Shipping, Duties and Other Taxes

Freight

369 kgs x $5

$1,845

Insurance

$1845 x 0.5%

$9.5

Duties

($19.6 + $1.85 + $0.615 + $0.0036) x 4.5% x 3000 pcs

$3,000

VAT

(($19.6 + $1.85 + $0.615 + $0.0036) + $1) x 4.5% x 3000 pcs

$13,800

Total Investment

$58800 + $5550 + $640 + $349 + $299 + $1170 + 1845 + $9.5 + $3000 + $13800

$85,462.5

Unit Cost

$85,462.5 / 3000 pcs

$28.49

Note: The calculated procurement price, per unit, is below our target price. Hence, we can motivate the necessary investment.

 

3. Summary

This Procurement budget calculation only considers the most essential costs. That said, there is no universal method for outsourcing production to China, and, as such – the costs vary from case to case. Below follows an overview of additional costs, that you may need to take into consideration, when making calculations for your own import budget:

• Business travel expenses

• Social compliance audits

• Design and engineering services

• Legal assistance

• Consultancy fees

• Licenses and permits

• Transaction fees


Fredrik Grönkvist is the co-founder of ScandinAsian Enterprise in Shanghai. Since 2010, he and his team have helped hundreds of companies worldwide, primarily in the EU and US, to develop and manufacture products in China. He is also the main contributor on www.chinaimportal.com, a leading knowledge base for small- to medium-sized enterprises importing from Asia. For further questions, you can contact him on www.chinaimportal.com/contact-us/.

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