STEP 8  - Determine Your Weighted Average Selling Price

The process for determining a  weighted average selling price is the very same as the process used to determine a  weighted average product cost. Moreover, the following calculations must be made;

1.   Calculate the weighted average selling price for each product line.
2.   Calculate the weighted average selling price (one single value).

1. Calculate your weighted average selling price for each product line:
Simply, multiply each product's selling price by its corresponding sales percentage forecast (Remember the sale percentage forecast is the rate at which you feel customers will buy each product (determined in Step 4). The resulting figure will be called "The Adjusted Factor". Then total the adjusted factors to arrive at a weighted average selling price for each product line. In John case, this will reduce the number of total selling prices from thirteen (13) down to six (6). Below illustrates John's calculations.

The first column lists each of the thirteen products John plans to sell. The second column represents the selling price of each product (determined in step 6). The third column represents the percentages at which John feels customers will buy each product (determined 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 Selling Price for each product line category. Below summarizes John's Weighted Average Selling Price for each product line category.

2.  Calculate the  Weighted Average Selling Price (one single value):
Now John's task is to reduce the number of selling prices from six (6) down to one (1)  weighted average selling price. In order to do this, John will need to refer back to the percentages in which he allocated to each product line (determined in Step 3). Recall, John's product line sales percentages were estimated as follow;

John now must multiply these percentages by the weighted average selling prices for each product line. 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 Selling Price. The following chart depicts the final process.

Therefore, John's Weighted Average Selling Price for his first year of operation is estimated to be $45.09. Recall from step 7, John's Weighted Average Product Cost for his first year of operations was estimated to be $22.55. What do these figures mean?

Summary - WEIGHTED AVERAGES EXPLAINED:

If John forecasted sales of 5,000 products (items of clothing) during his first year of operation, then his total forecasted dollar sales would be $225,450. This was arrived at by multiplying 5,000 product sold by John's Weighted Average Selling Price of $45.09 (5,000 x $45.09 = $225,450). OR if John forecasted sales of 10,000 products (items of clothing) during his first year of operation, then his total forecasted dollar sales would be $450,900. This was arrived at by multiplying 10,000 product sold by John's Weighted Average Selling Price of $45.09 (10,000 x $45.09 = $450,900). And so on...

On the other end of the continuum, if John forecasted sales of 5,000 products (items of clothing) during his first year of operation, then his total forecasted cost to purchase these products would be $112,750. This was arrived at by multiplying 5,000 product purchased by John's Weighted Average Product Cost of $22.55 (5,000 x $22.55 = $112,750). OR if John forecasted sales of 10,000 products (items of clothing) during his first year of operation, then his total forecasted cost to purchase these products would be $225,500. This was arrived at by multiplying 10,000 product purchased by John's Weighted Average Selling Price of $22.55 (10,000 x $22.55 = $225,500). And so on..

The above figures are based on the "Sales Percentage Forecasts" that John estimated in step 3 and step 4. In other words, if customers buy at the rate John estimated in steps 3 & 4, then his Weighted Average Selling Price and Weighted Average Product Cost will be $45.09 and $22.55 respectively. As you can see, two (2) numbers will be much easier to work with than twenty-six numbers (IE   13 selling prices and 13 product costs).

Good luck calculating your weighted averages.  Following each step in sequence and you should have no problem.