Free on Board

Lesson:

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.

Juliet Corp. had agreed to sell some pencils to Igloos Unlimited.

The only relevant information you've discovered is as follows:

  • A thief stole the pencils while they were being transported.
  • Lawyers were quick to point out that the deal was free on board origin.
Who must bear the cost of the loss?

Answer:

  • Igloos Unlimited is responsible

Explanation:

  1. Look at the shipping type. It's FOB origin, which means that once the shipper picks it up, all liability transfers to the buyer.
  2. The pencils were in transit, so Igloos Unlimited (the buyer) is liable.
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