Are you considering opening a dollar store? If so, one of the areas of focus for you as you work to keep costs under control will be the cost of the goods sold. Merchandise costs are often the single largest expense for a dollar store. Knowing what dollar cost averaging is, and how to best use it can be a powerful tool for the entrepreneur whose goal is to reduce those costs.
So exactly what is dollar cost averaging? Dollar cost averaging is simply taking the average total cost of all items purchased in a specific interval. It might be for one order, for one week, one month or one year. The total cost is divided by the total number of items that the store received for that amount of money.
For example, let’s assume that you paid $100.00 for an order of toys. There were 200 items in the order and the freight was prepaid by the distributor. In this example divide $100.00 by the 200 items for an average cost of good sold of $0.50 for that order. While items within the order may have ranged from $0.35 to $0.80, the average was $0.50. If you are opening a dollar store this is important information to have as a part of the decision making process.
By knowing the average across your chosen metric, the entrepreneur who is opening a dollar store can then instantly see whether the average of all purchases is going up, down, or remaining the same. Buying decisions can then be made based on that average. In our example above, removing 12 each of the $0.80 items and replacing them with 24 each of $0.40 items can have a strong impact on the average for that one order. In this case, the impact would be to lower the overall average.
