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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
Kilo Industries had agreed to purchase some lightbulbs from Kilo Industries.

Here's what you know:

  • The contract is labeled F.O.B. destination.
  • The lightbulbs were burned before they was picked up by the shipper.
Who must bear the cost of the loss?
Answer
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👉 Answer:

  • Kilo Industries is responsible

👨‍🎓 This is how we solve it:

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