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Free on Board

Lesson
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The phrase Free on Board (often abbreviated FOB or F.O.B.) is an important concept in the world of inventory management.

It is used to specify the point at which an item's ownership is transferred from seller to buyer.

Being able to clearly specify this point is critical because it will determine who is responsible, should the item become damaged or stolen.

Fortunately, identifying this point is very easy.

An item can either be labeled as:

  • FOB origin - the item's ownership is transferred when it is shipped (the ownership changes at the origin)
  • FOB destination - the item's ownership is transferred when it arrives (the ownership changes at the destination)

It is important to note that ownership only transfers when an item is either picked up, or delivered. A vendor that puts an item on a loading dock, for instance, hasn't yet transferred the item's ownership. This is because the item has not yet been picked up for transport.

Question
Bill corp. had agreed to purchase some clocks from Evan LLC.

This is what you've been told:

  • A thief stole the clocks while they were on the loading dock at the vendor's shipping point.
  • Lawyers were quick to point out that the deal was free on board destination.
Who is responsible for the loss?
Answer
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👉 Answer:

  • Evan LLC is responsible

👨‍🎓 Here are the steps to figure it out:

  1. Look at the shipping type. It's FOB destination, which means that the clocks must be delivered before liability transfers to the buyer.
  2. The clocks had not yet been in transit, so Evan LLC (the seller) is liable.
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