STEP 7 - Calculate Your Weighted Average Product Cost
Two final calculations are required in order to determine a weighted average product cost.
1. | Calculate the weighted average product cost for each product line |
2. | Calculate the weighted average product cost (one single value) |
1. - Calculate the weighted average product cost for each product line:
Simply, multiply each product cost by its corresponding sales percentage forecast (Remember the sale percentage forecast is the rate at which you feel customers will buy each product or brand name item (developed in step 4). The resulting figure will be called "The Adjusted Factor". Then total the adjusted factors to arrive at a weighted average product cost for each product line. In John's case, this will reduce the number of product costs from thirteen (13) down to six (6). Here's how John would organize his chart.
Total Cost Per product |
x | Sales % Forecast |
Adjusted Factor |
||
Denim Jeans | |||||
Levi Jeans | $ 28.00 | x | 50% | = | 14.00 |
Edwin Jeans | $ 33.00 | x | 25% | = | 8.25 |
Guess Jeans | $ 30.00 | x | 15% | = | 4.50 |
Ikeda Jeans | $ 29.00 | x | 10% | = | 2.90 |
Weighted Average Product Cost for Jeans | $ 29.65 | ||||
Casual Pants | |||||
Dockers Pants | $ 25.00 | x | 60% | = | 15.00 |
Cream Pants | $ 28.00 | x | 40% | = | 11.20 |
Weighted Average Product Cost for Pants | $ 26.20 | ||||
Sweaters | |||||
London Fog Sweaters | $ 25.00 | x | 62% | = | 15.50 |
Guess Sweaters | $ 28.00 | x | 38% | = | 10.64 |
Weighted Average Product Cost for Sweaters | $ 26.14 | ||||
Long Sleeve Shirt | |||||
Polo | $ 16.00 | x | 60% | = | 9.60 |
Gasoline | $ 17.00 | x | 40% | = | 6.80 |
Weighted Average Product Cost for L\S Shirts | $ 16.40 | ||||
T-Shirts | |||||
Hollywood | $ 8.00 | x | 50% | = | 4.00 |
Manager | $ 9.00 | x | 50% | = | 4.50 |
Weighted Average Product Cost for T-Shirts | $ 8.50 | ||||
Belts | |||||
Razzy | $ 10.00 | x | 100% | 10.00 | |
Weighted Average Cost for Belts | $10.00 |
The first column lists each of the thirteen products John plans to sell. The second column represents the total cost (including shipping) of each product (determined in step 5). The third column represents the percentages at which John feels customers will buy each product (developed in step 4). The forth column, "The Adjusted Factor", is the result of column 2 multiplied by column 3. The sum of all adjusted factors become the Weighted Average Product Cost for each product line category. Below summarizes John's Weighted Average Product Cost for each Product line category.
ITEM |
Weighted Average Cost For Each Product Line |
Denim Jeans | $ 29.65 |
Casual Pants | $ 26.20 |
Sweaters | $ 26.14 |
Long Sleeve Shirt | $ 16.40 |
T-Shirts | $ 8.50 |
Belts | $ 10.00 |
Remember John had started out with thirteen (13) costs and now he has six product costs - a weighted average cost for Jeans, Casual Pants, Sweaters, Long-Sleeve Shirts, T-Shirts, and finally Belts.
2. - Calculate the weighted average product cost (one single value):
Now John's task is to reduce these six product costs down to one product cost. The resulting product cost will become known as John's "Weighted Average Product Cost". In order to do this, John will need to refer back to the sales percentages in which he allocated to each product line (calculated in Step 3). Recall, John's product line sales percentages were estimated as follow:
Product Line Category | Estimated Percentage of customers buying .... |
Denim Jeans | 40% |
Casual Pants | 15% |
Sweaters | 5% |
Long Sleeve Shirt | 25% |
T-Shirts | 10% |
Belts | 5% |
Total Percentage | 100% |
John now must multiply these percentages by the weighted average product cost per category (calculated in step 7 above). Once again, we will call the resulting figure "The Adjusted Factor". The adjusted factors will then be added together and the sum will become known as John's "Weighted Average Product Cost". The following chart depicts the final process.
Weighted Average Cost Per Product |
Forecasted Selling % |
Adjusted Factor |
|||
Denim Jeans | $ 29.65 | x | 40% | = | 11.86 |
Casual Pants | $ 26.20 | x | 15% | = | 3.93 |
Sweaters | $ 26.14 | x | 5% | = | 1.31 |
Long Sleeve Shirts | $ 16.40 | x | 25% | = | 4.10 |
T-Shirts | $ 8.50 | x | 10% | = | 0.85 |
Belts | $ 10.00 | x | 5% | = | 0.50 |
100% | |||||
Weighted Average Product Cost | $ 22.55 |
Congratulations!!! You have just calculated John's Weighted Average Product Cost to be $22.55. In essense, you have reduced the number of product costs from thirteen (13) down to one product cost. This will save John a great deal of time and frustration when he develops his forecasted financial statements.
Your probably wondering what the weighted average product cost of $22.55 means. Before we reveal the secret, lets calculate the Weighted Average Selling Price for John's retail clothing store (step 8).