Average Cost Price

We know that when we buy a product, we have to pay for it. Actually, we buy goods and products at their selling prices or the MRP. But what about the shopkeeper? Does he get any profit from selling goods to us?

Of course, he gets his profit amount for selling goods.

So, what is the actual cost price of the goods? How much a shopkeeper earns on each product and how to calculate average cost price.

When there are many products to be bought and sold, we use the concept of average cost price. Also, mathematics has given us an average cost price and average cost formula to make the buying and selling process easier.           

Cost Price and Selling Price

The amount that is spent by the manufacturer to produce goods or services before any profit is added for the producer or the amount at which a good is bought/purchased before selling it to the customer is called cost price. Cost price is also known as CP. It is the original price of any product. The price at which a  good is finally sold to us is called its selling price.

How to Find the Cost Price?

Consider the situation given below.

Suppose your friend gives you ₹20 for a pen that you got for ₹15. Is it the actual cost of the pen?

No, it is not. In this case,₹15 was the cost price for you as it was the amount at which you bought the pen. But ₹20 will be the cost price for your friend, while that same amount of ₹20 will be your selling price. In this case, you are earning a profit of ₹5.

So, CP= SP- profit 

If we reverse the situation and assume that you sold the pen to your friend at ₹10, then ₹10 becomes your SP and her CP. In this case, you are incurring a loss of 5.

So, CP=SP+ loss 

Similarly, in the supply chain, somebody’s cost price is someone else’s selling price. The manufacturer actually pays the cost for the pen and gets a profit amount on selling it to the distributor.

The distributor also gets an amount of profit for selling it to the shopkeeper. After that, the shopkeeper also gets a profit from selling the pen to us at the MRP.

Average Cost Price and Average Cost Formula

The average cost price is the mean of all cost prices or the ratio of cost of all products to the number of products.  In other words, it is the arithmetic average of the amount involved in producing the total number of items.

= (total cost of production divided by the number of units).

Suppose a shopkeeper combined a new stock of shoes with an old stock, and the new price overstates the value of the stock holding. There is a better method to combine the total cost price of both stocks.

The formula to calculate the average cost price is given below:    

             X = ∑(xi)/n

The symbol ∑, called sigma is used for the notation of summation.

xi is the sum of cost prices and n is the number of total items.

Examples of Average Cost Price

Problem 1:

A shopkeeper sells different types of shoes. He sells six shoes for the costs ₹700, ₹750, ₹800, ₹1000, ₹1100 and ₹1350. Find the average cost price of a shoe he sold.

Solution:

Number of shoes= 6

Average cost price X = ∑(xi)/n

X= (700+750+800+1000+1100+1350)/6

X= 5700/6

X= ₹950

Hence, the average cost price of shoes is ₹950.


Problem 2:

A shopkeeper has four plastic buckets in old stock for cost prices ₹100, ₹120, ₹130 and ₹150. He combines four new plastic buckets with the old stock for cost prices ₹140, ₹160, ₹175 and ₹185. Find the average cost price of the total stock? Also, find his net loss or gain if he sells each old bucket for ₹140 and each new bucket for ₹160.

Solution: 

Total number of plastic buckets= old stock + new stock

=4+4= 8

Average cost price X = ∑(xi)/n

X= (100+120+130+150+140+160+175+185)/8

X= 1160/8

X= ₹145.

Hence, the average cost price of the total stock is ₹145.

Total SP of old buckets = ₹140x4= ₹560

Total SP of new buckets= ₹160x4= ₹640 

Therefore, the total selling price is (560+640)= ₹1200. 

Total cost price= ₹1160 

This is a case of profit as SP> CP. The profit here is (1200-1160) = ₹40. 


Did You Know? 

When we calculate the net profit or loss percentage for any business transaction, it is always expressed in terms of the cost price. 

Therefore, profit % = (profit/CP)x100 and loss %= (loss/CP)x100

FAQ (Frequently Asked Questions)

1. What is MRP?

Solution: MRP stands for Maximum Retail Price. MRP is usually printed on all packaged and standardized articles. Shopkeepers cannot sell any article over its MRP, as it is inclusive of all taxes. However, in situations where the demand of a commodity is more than its supply, retailers and shopkeepers do resort to unfair malpractices, where they try to earn lucrative profits by selling their products much above the MRP. 

 2. How a Person Can Get Profit Over Average Cost Price?

Solution: To make a profit on any deal, you should have to sell the product over the cost price, otherwise you'll get lost.

Profit = selling price - cost price

In case of average cost price, you have to sell each product over the average cost price to gain a certain amount of profit.

In the first example mentioned above, the shopkeeper should sell every pair of shoes over ₹950 to earn a profit.