Question

Sellers negotiate sales contracts with customers. (a) What type of shipping terms should a seller attempt to negotiate to minimize freight costs? (b) Why would a company's manager be concerned about the quantity of its purchase returns if its suppliers allow unlimited returns?

Answer 1

1. Free on board Shipping point is the mechanism where seller responsibility gets completed when he places the goods sold on the delivery vehicle despatched to the buyer. Thus the buyer bears the costs associated with freight, it's associated costs, taxes and customs. Thus seller should negoitate for FOB Shipping point with the buyer.
2. The company's purchase department has to incurr costs on identitying, examining, storage and returning the goods back to the supplier. Moroever incurr similar set of costs on the replacements supplied in exchange for the goods returned. Thus purchase returns increases recurring expenses and it is a concern for the manager.