I.

Summary:
Basic information:
- Seller: ABC Trading Co., Vietnam.
- Buyer: DNZ Trading Co., Japan.
- Goods: 3000 tons of coffee.
The selling price is offered under three trade terms:
- FOB Saigon port: 700,000 USD.
- CIF Tokyo port: 850,000 USD.
- DAP buyer’s warehouse in Tokyo: 950,000 USD.
Cost:
- Freight (including loading fee to bring the goods from Saigon port to
Tokyo port): F = 150,000USD.
- Transportation cost (including loading and unloading fee to bring the
goods from Tokyo port to the buyer’s warehouse): T = 80,000 USD;
- Insurance rate: R = 0.2%.
- Import duty: 5% based on FOB
II. Case analysis:
1. Which selling prices under trade terms should the buyer select?
In this case, we must consider both the costs and risks of each of the
three selling prices under different terms in order for the buyer to
save money while minimizing risks.
2. When and where the risk and cost of the goods are transferred
under DDP terms. Also according to DDP what are the risks and
costs up until the products are delivered to the buyer's warehouse?
3. Analyze the differences between DAP and DDP in terms of the
responsibilities of seller and buyer.
III. Solutions:
1. What the selling price does the buyer choose? Why?
In order to determine the optimal selling price, the buyer must weigh the
risk and the cost he must endure. For easier comparison, we should put
each option at the same transfer risk point, which we chose the FOB
term in this case, to base on for the decision making. Therefore, we will
calculate the cost of each case under the DAP term and select the most
cost-effective choice.
● Case 1: FOB Saigon port is 700,000 USD.
FOB(a) = $700,000
● Case 2: CIF Tokyo port is 850,000 USD.
CIF = $850,000 = (FOB(b) + F) x (1 + R)
=> FOB(b) = CIF/(1 + R) - F
= 850,000/(1 + 0.2%) - 150,000
= $698,300
About the DAP term, insurance is not an obligation and in this situation,
we do not have any information to conclude if the DAP offered selling
price is included insurance or not. Therefore, we have 2 cases as below.
● Case 3: DAP buyer’s warehouse in Tokyo is 950,000 USD with
insurance.
DAP = $950,000 = FOB(c) + F + T + Insurance
= (FOB(c) + F + T) x (1 + R)
=> FOB(c) = DAP/(1 + R) - F - T
= 950,000/(1 + 0.2%) - 150,000 - 80,000
= $718,100
● Case 4: DAP buyer’s warehouse in Tokyo is 1,000,000 USD without
insurance.
DAP = $950,000 = FOB(d) + F + T
=> FOB(d) = DAP - F - T
= 950,000 - 150,000 - 80,000
= $720,000
In comparison, we see that FOB(d) > FOB(c) > FOB(a) > FOB(b), which means
that the second case using CIF costs the lowest price. In conclusion, the
buyer should choose the CIF selling price that the seller offered.
 2. If the buyer wants to buy under the term of DDP, What must the seller
pay costs and bear risks under the term of DDP at the buyer’s
warehouse in Tokyo?
DDP (Delivery duty paid): the delivery of goods where the seller takes
most responsibility. Under DDP, the supplier is responsible for paying for
all of the costs associated with the delivery of goods right up until they get
to the named place of destination. The buyer is then responsible for
unloading the goods at the end destination.
● Costs:
In this case, if the buyer decides to make a transaction under the DDP
term, the seller has to be responsible for all shipping costs, as well as
customs clearance fees, import duties, and taxes. Essentially, the seller
pays for all fees associated with getting the goods to the buyer. Besides,
according to incoterm 2020, the seller has no obligation to make a
contract of insurance. However, the seller must provide the buyer, at the
buyer’s request.
● Risks:
While the DDP is advantageous for buyers who know the total landed cost,
for sellers, it is a high-risk position as they remove the obligations from
the buyer and assume all costs to the point of delivery.
This does give the seller control over the shipment, but it also means they
are responsible for the goods from the time of purchase until they reach
their destination and are ready for unloading.
Additionally, the seller is responsible for bringing the goods through
foreign customs, which not only means familiarity with the country’s
recordkeeping and import regulations but also bearing the costs of
customs and carrier delays which can quickly eat into the seller’s
profits.
3. What are the main differences between DAP and DDP at the buyer’s
warehouse in Tokyo?
Considering DAP and DDP at the buyer’s warehouse in Tokyo, the unique
difference between them is that under DDP Term, the exporters have to
bear the costs and risks involved to bring the product which means that
they must pay for import taxes and customs clearance. While these costs
are paid by importers under DAP Term.
- Under DAP Term: the custom clearance is completed by importers
and they have to pay for import duties.
- Under DDP Term: the custom clearance is completed by exporters
and they have to pay for import duties because the selling price
includes these costs. The importers are only responsible for
unloading costs.
The table below compares the costs bear by importers and importers
under DAP and DDP Term:

Exporters Importers

DAP EXW, Pre, Main, On-carriage Custom clearance, Duty,

Taxes, Unloading

DDP EXW, Pre, Main, On-carriage, Unloading

Custom clearance, Duty, Taxes