1. The problem is to understand the formula for calculating the cost basis using the average cost method. 2. The average cost basis is used to determine the cost per share when multiple purchases of the same stock or asset are made at different prices. 3. The formula for average cost basis is: $$\text{Average Cost Basis} = \frac{\text{Total Cost of Shares Purchased}}{\text{Total Number of Shares Purchased}}$$ 4. Important rules: - Include all purchase costs (price per share times number of shares) in the total cost. - Include all shares bought in the total number of shares. - This method smooths out the cost per share over multiple purchases. 5. Example: If you bought 10 shares at 20 each and 15 shares at 25 each, then: Total Cost = $10 \times 20 + 15 \times 25 = 200 + 375 = 575$ Total Shares = $10 + 15 = 25$ Average Cost Basis = $\frac{575}{25} = 23$ 6. This means each share is considered to have cost 23 on average for tax or accounting purposes. This method helps simplify tracking and reporting gains or losses when shares are sold.