Q3: Explain the concept of total landed cost as it related to transportation. How does it influence market boundaries? In simple terms, landed cost is production cost plus transportation must If the landed cost of the product is lower than that of other sources, there . ill usually be a demand for that product and also for the transportation of that product from its origin point. For example, let's assume that a product manufacturer located in City A is competing in City B with local producers. For the City A manufacturer to be competitive, the landed costs of his product must be lower than the cost of the local manufacturer's product prices. Maximum Transport City A City B Cost = $1 Production Production Cost = $3 Cost = $4 The landed cost also determines the extent of the market for business. The greater the distance the product is shipped, usually the higher the landed cost. At some distance from the product's source, the landed cost usually becomes prohibitive to the buyer and there will be no demand for that product at that point. The company with the lower landed cost will have a greater market area than the firin with the higher transportation costs. For example, the figure below presents a case of two producers located 200 miles apart. Producer P has a production cost of $50 per unit and transportation cost of $0.60 per unit per mile. Producer S also has a production cost of $50 per unit but a transportation cost of $0.50 per unit per mile. The extent of the market between the two producers is the point at which their landed costs are equal. P has a market area that extends 90.9 miles from its plant and S has a market area that extends 109 miles from its facility. 200 Miles Production = $50/unit Production = $50/unit Transportation = $0.60/unit/mile Transportation = $0.50/unit/mile That's how landed cost influence the market boundary of a product