 Hello and welcome to the session in which you would look at an exercise that deals with transfer pricing. This topic is covered in cost accounting, managerial accounting, as well as the CPA exam. Now, if you are a CPA candidate, I strongly suggest you check out my website, farhatlectures.com for additional resources. If you are studying, look, if you have a CPA review course, that's fine. You can keep it. I don't replace your CPA review course. I can be a useful addition, a supplement to your existing course. I can add 10 to 15 points to your CPA exam score by explaining the material slower and more in depth. I don't assume any prior knowledge in contrast to these CPA review courses. And here's your risk, $30 to try me out. If you don't like it, you lost $30. What's the outcome? Passing the CPA exam, adding 10 to 15 points to your CPA exam. Do you think it's worth it? Well, I would think about it if I was in your shoes. Also, if not for anything, check out my website to find out what is your CPA exam score for your college. It tells you the score per section as well as the overall score. I do also have resources for other courses, which all comes with the same subscription. If you have it connected with me on LinkedIn, please do so. And check out my LinkedIn recommendations. Simply put, students who already used my system to succeed on the CPA exam, please like this recording and share it on YouTube, connect with me on Instagram and Facebook. Let's take a look at this question and answer some of the questions to understand a little bit further transfer pricing. Now, I do have lectures about transfer pricing. This is basically an example. So you can go back and look at the lectures if you'd like to before you'll try to answer this question. San Jose Company operates a manufacturing division and an assembly division. Both divisions are evaluated as profit centers. Assembly buys component from manufacturing and assembles them, assemble them from sale. So the manufacturing, they sell it to the assembly. Manufacturing sells many components to third parties in addition to the assembly. So this company here, the manufacturing, it also sells at the third party. So it's not only they sell it to the assembly line, they sell it to another party. And we are giving the data. The capacity is 400,000 unit. The selling price to the outsider is $400. The variable cost is 160. Fixed cost is 40 million. The assembly line, 200,000 capacity, they sell it for 1,300. The variable cost is 480. So we're going to look at the first question of the current production level in the manufacturing or 200,000 unit. What does that mean? It means now they are manufacturing 200,000, but they have the capacity to produce 400,000. So they're at 50% capacity. They have plenty of capacity. Assembly requests an additional 40,000 unit to produce a special order. What transfer price would you recommend? What transfer price would I recommend? If I have plenty of capacity, the optimal transfer price here is the variable cost, which is 160. Now, can I charge them more? Yes. But since I have idle capacity, you know, plenty of idle capacity, 160, I can cover my variable cost. Suppose manufacturing is operating at full capacity. It means I am producing at 400,000 and selling at 400,000. What transfer price would you recommend? Under those circumstances, I cannot give it to them at 160. I'm going to sell it to them at $400 because if I don't sell it to them, I can sell it somewhere else for 400. It's not like I am not being able to sell my product. Therefore, I would charge $400. Suppose manufacturing is operating at 380,000 unit. What transfer price would you recommend and why? Well, we are little bit below. If they want 40,000 additional unit, well, we are a little bit below the capacity. We are 20,000 below the capacity. For those first 20,000, we'll charge them $160 and for the remaining 20,000 unit, we're going to have to charge them a full $400. Now, obviously we cannot sell them some at 160, some at 400. We have to figure out what should be the overall price that we will need to charge them. Well, let's see. So what we do is we take 200. Let me get the calculator here and start with computing the numbers. 20,000 unit times 160. That's 3.2 million. Let me just make sure this stays. 3.2 million, then 20,000 unit. Now, for these 20,000 units, I have because I'm above capacity. So I have to charge them the full price. 20,000 unit times 400. It is 8 million. So 8 million plus 3.2 million. That's going to give me a total of 11.2 million. 11.2 million. That should be the total selling price, the total selling price. I'm going to take 11.2 million. I'm going to divide this by 40,000 unit. Remember those additional 20,000. I have to charge them the full price. Therefore, I would sell them each unit at $280. The first 20 units simply put, it will average the first 20 unit at 160. The remaining 400,000, but it will average at $280. The point to learn from this exercise is this. If you have idle capacity, generally speaking, you would sell at variable cost. Can you sell more than the variable cost? Yes, you can sell a little bit more than the variable cost. But if you want the assembly line to have more pricing power, you would sell at the variable cost. If you have no, if you don't have any idle capacity, if you are operating at full capacity, you want to charge them the full price, otherwise you'll be losing. And let, let her see it someplace in between. At the end of this recording, I'm going to ask you again to like the recording, share it, check out my website, study hard, and most importantly, stay safe.