What Is Average Selling Price (ASP)?

The term average selling price (ASP) refers to the price at which a certain class of good or service is typically sold. The average selling price is affected by the type of product and the product life cycle. The ASP is the average selling price of the product across multiple distribution channels, across a product category within a company, or even across the market as a whole.

Understanding Average Selling Price (ASP)

The average selling price is the price for a product or service in various markets, and is normally used in the retail and technology industries. The established ASP for a particular good can act as a benchmark price, helping other manufacturers, producers, or retailers set the prices for their own products.

Marketers who try to set a price for a product must also consider where they want their product to be positioned. If they want their product image to be part of a high-quality choice, they have to set a higher ASP.

Products like computers, cameras, televisions, and jewelry tend to have higher average selling prices while products like books and DVDs will have a low average selling price. When a product is the latter part of its product life cycle, the market is most likely saturated with competitors, therefore, driving down the ASP.

In order to calculate the ASP, divide the total revenue earned from the product by the total number of units sold. This average selling price is usually reported during quarterly financial results and can be considered as accurate as possible given regulation on fraudulent reporting.

Special Considerations

The smartphone market is a big industry which uses average selling prices. In the smartphone market, the average selling price indicates how much money a handset manufacturer is receiving on average for the phones that it sells.

For product-driven companies like Apple, calculations for average selling price provide pivotal information about its financial performance and, by extension, the performance of its stock price. In fact, there’s a clear relationship between Apple’s iPhone ASP and its stock price movements.

The iPhone’s ASP matters even more when considering how each device drives overall profitability for Apple. Apple consolidates its operations under a single profit-and-loss statement (P&L), meaning investors can’t tell how costs, such as marketing and research and development (R&D) are spread among the company’s various products.

Since the iPhone has the highest gross margin in Apple’s device family, the device generates the lion’s share of Apple’s profits. That makes the iPhone crucial in determining Apple’s overall financial performance each quarter.

Examples of Average Selling Price

The term average selling price has a place in the housing market. When the average selling price of a home within a particular region rises, this may be a signal of a booming market. Conversely, when the average price drops, so does the perception of the market in that particular area.

Some industries use ASP in a slightly different way. The hospitality industry—especially hotels and other lodging companies—commonly refers to it as the average room or average daily rate. These average rates tend to be higher during peak seasons, while rates normally drop when travel seems to be low or during off-seasons.

What Is Accounting Profit?

Accounting profit is a company’s total earnings, calculated according to generally accepted accounting principles (GAAP). It includes the explicit costs of doing business, such as operating expenses, depreciation, interest, and taxes.

How Accounting Profit Works

Profit is a widely monitored financial metric that is regularly used to evaluate the health of a company. 

Firms often publish various versions of profit in their financial statements. Some of these figures take into account all revenue and expense items, laid out in the income statement. Others are creative interpretations put together by management and their accountants.

Accounting profit, also referred to as bookkeeping profit or financial profit, is net income earned after subtracting all dollar costs from total revenue. In effect, it shows the amount of money a firm has left over after deducting the explicit costs of running the business.

The costs that need to be considered include the following:

• Labor, such as wages
• Inventory needed for production
• Raw materials
• Transportation costs
• Sales and marketing costs
• Production costs and overhead

Accounting Profit vs. Economic Profit

Like accounting profit, economic profit deducts explicit costs from revenue. Where they differ is that economic profit also uses implicit costs; the various opportunity costs a company incurs when allocating resources elsewhere.

Examples of implicit costs include:

• Company-owned buildings
• Plant and equipment
• Self-employment resources

For example, if a person invested $100,000 to start a business and earned $120,000 in profit, their accounting profit would be $20,000. Economic profit, however, would add implicit costs, such as the opportunity cost of $50,000, which represents the salary they would have earned if they kept their day job. As such, the business owner would have an economic loss of $30,000 ($120,000 – $100,000 – $50,000).

Economic profit is more of a theoretical calculation based on alternative actions that could have been taken, while accounting profit calculates what actually occurred and the measurable results for the period. Accounting profit has many uses, including for tax declarations. Economic profit, on the other hand, is mainly just calculated to help management make a decision.

Accounting Profit vs. Underlying Profit

Companies often choose to supplement accounting profit with their own subjective take on their profit position. One such example is underlying profit. This popular, widely-used metric often excludes one-time charges or infrequent occurrences and is regularly flagged by management as a key number for investors to pay attention to.

The goal of underlying profit is to eliminate the impact that random events, such as a natural disaster, have on earnings. Losses or gains that do not regularly crop up, such as restructuring charges or the buying or selling of land or property, are usually not taken into account because they do not occur often and, as a result, are not deemed to reflect the everyday costs of running the business.

Example of Accounting Profit

Company A operates in the manufacturing industry and sells widgets for $5. In January, it sold 2,000 widgets for a total monthly revenue of $10,000. This is the first number entered into its income statement.

The cost of goods sold (COGS) is then subtracted from revenue to arrive at gross revenue. If it costs $1 to produce a widget, the company’s COGS would be $2,000, and its gross revenue would be $8,000, or ($10,000 – $2,000).

After calculating the company’s gross revenue, all operating costs are subtracted to arrive at the company’s operating profit, or earnings before interest, taxes, depreciation, and amortization (EBITDA). If the company’s only overhead was a monthly employee expense of $5,000, its operating profit would be $3,000, or ($8,000 – $5,000).

Once a company derives its operating profit, it then assesses all non-operating expenses, such as interest, depreciation, amortization, and taxes. In this example, the company has no debt but has depreciating assets at a straight line depreciation of $1,000 a month. It also has a corporate tax rate of 35%.

The depreciation amount is first subtracted to arrive at the company’s earnings before taxes (EBT) of $1,000, or ($2,000 – $1,000). Corporate taxes are then assessed at $350, to give the company an accounting profit of $650, calculated as ($1,000 – ($1,000 * 0.35).

What Are Adjusted Funds From Operations—AFFO?

Adjusted funds from operations (AFFO) refers to the financial performance measure primarily used in the analysis of real estate investment trusts (REITs). The AFFO of a REIT, though subject to varying methods of computation, is generally equal to the trust’s funds from operations (FFO) with adjustments made for recurring capital expenditures used to maintain the quality of the REIT’s underlying assets. The calculation takes in the adjustment to GAAP straight-lining of rent, leasing costs, and other material factors.

Understanding Adjusted Funds From Operations—AFFO

Regardless of how industry professionals choose to compute adjusted funds from operations (AFFO), it is considered to be a more accurate measure of residual cash flow for shareholders than simple FFO. Though FFO is commonly used, it does not deduct for capital expenditures required to maintain the existing portfolio of properties, so it doesn’t quite measure the true residual cash flow. Professional analysts prefer AFFO because it takes into consideration additional costs incurred by the REIT—and additional income sources too, like rent increases. Thus, It provides for a more accurate base number when estimating present values and a better predictor of the REIT’s future ability to pay dividends. This is a non-GAAP measure.

Calculating Adjusted Funds From Operations—AFFO

Before calculating the AFFO, an analyst must first determine the REIT’s funds from operations (FFO). The FFO measures cash flow from a specified list of activities. FFO reflects the impact from the REIT’s leasing and acquisition activity, as well as interest costs. FFO takes into account the REIT’s net income including amortization and depreciation, but it excludes the capital gains from property sales. The reasons these gains are not included is that they are one time events and generally do not have a long-term effect on the REIT’s future earnings potential.

The formula for FFO is:

FFO = net income + amortization + depreciation – capital gains from property sales

Once the FFO is determined, the AFFO can be calculated. Though there is no one official formula, calculations for AFFO typically would be something like:

AFFO = FFO + rent increases – capital expenditures – routine maintenance amounts

Example of an Adjusted Funds From Operations—

AFFO Calculation

As an example of the AFFO calculation, assume the following: a REIT had $2 million in net income over the last reporting period. During that time, it earned $400,000 from the sale of one of its properties and lost $100,000 from the sale of another. It reported $35,000 of amortization and $50,000 of depreciation. During the period, net rent increases were $40,000; capital expenditures were $75,000 and routine maintenance amounted to $30,000.

Given this information the FFO can be calculated as:

FFO = $2,000,000 + $35,000 + $50,000 – ($400,000 – $100,000) = $1,785,000

From this, the AFFO is calculated as:

AFFO = FFO + $40,000 – $75,000 – $30,000 = $1,720,000

What is the Average Daily Balance Method?

The average daily balance is a common accounting method that calculates interest charges by considering the balance invested or owed at the end of each day of the billing period, rather than the balance invested or owed at the end of the week, month, or year.

Understanding the Average Daily Balance Method

The federal Truth-In-Lending-Act (TILA) requires lenders to disclose their method of calculating finance charges, as well as annual percentage rates (APR), fees, and other terms, in their terms and conditions statement. Providing these details makes it easier to compare different credit cards.

TILA permits the interest owed on credit card balances to be calculated in various different ways. The most common methods are:

• Average daily balance method: Uses the balance on each day of the billing cycle, rather than an average balance throughout the billing cycle, to calculate finance charges.
• Previous balance method: Interest charges are based on the amount owed at the beginning of the previous month’s billing cycle.
• Adjusted balance method: Bases finance charges on the amount(s) owed at the end of the current billing cycle after credits and payments have been posted.

How the Average Daily Balance Method Works

The average daily balance totals each day’s balance for the billing cycle and divides by the total number of days in the billing cycle. Then, the balance is multiplied by the monthly interest rate to assess the customer’s finance charge—dividing the cardholder’s APR by 12 calculates the monthly interest rate. However, if the lender or card issuer uses a method that compounds interest daily, the interest associated with the day’s ending balance gets added to the next day’s beginning balance. This will result in higher interest charges and the reader should confirm which method is being used.

The average daily balance credits a customer’s account from the day the credit card company receives a payment. To assess the balance due, the credit card issuer sums the beginning balance for each day in the billing period and subtracts any payments as they arrive and any credits made to the customer’s account that day.

Cash advances are usually included in the average daily balance. The total balance due may fluctuate daily because of payments and purchases.

Average Daily Balance Method Example

A credit card has a monthly interest rate of 1.5 percent, and the previous balance is $500. On the 15th day of a billing cycle, the credit card company receives and credits a customer’s payment of $300. On the 18th day, the customer makes a $100 purchase.

The average daily balance is ((14 x 500) + (3 x 200) + (13 x 300)) / 30 = (7,000 + 600 + 3,900) / 30 = 383.33. The bigger the payment a customer pays and the earlier in the billing cycle the customer makes a payment, the lower the finance charges assessed. The denominator, 30 in this example, will vary based on the number of days in the billing cycle for a given month.

Average Daily Balance Method Vs. Adjusted Balance Method Vs. Previous Balance Method

Interest charges using the average daily balance method should be lower than the previous balance method, which charges interest based on the amount of debt carried over from the previous billing cycle to the new billing cycle. On the other hand, the average daily balance method will likely incur higher interest charges than the adjusted balance method because the latter bases finance charges on the current billing period’s ending balance.

Card issuers use the adjusted balance method much less frequently than either the average daily balance method or the previous balance method.

Special Considerations

Some credit card companies previously used the double-cycle billing method, assessing a customer’s average daily balance over the last two billing cycles.

Double-cycle billing can add a significant amount of interest charges to customers whose average balance varies greatly from month to month. The Credit CARD Act of 2009 banned double-cycle billing on credit cards.