 Hello and welcome to this session. This is Professor Farhad in which we would look at cost plus pricing. This topic is typically covered in cost accounting, managerial accounting, as well as the CPA exam. If you're interested in topics like managerial accounting, cost accounting, as well as the CPA exam to supplement your education, please visit my website, farhadlectures.com. And a cost plus pricing, the company is a price setter. What does it mean when we say the company is a price setter? I want you to think of the first iPhone. The first iPhone when the first iPhone came out, if you wanted to buy this iPhone, it would have cost you $499. Actually, I bought one of them, but I did not pay for $499. I only paid $99 because the phone company financed the rest. I'm not sure if I had the Ryzen or AT&T. I can't remember. That was a long time ago. So that was that. So why was Apple was able to charge, which was $500 for a phone? That's a lot today. I mean, right now, their iPhone is over a thousand, but back then it was a lot. The reason is they were able to charge you $499 because the product was unique. There was no smartphone in the market. So Apple can charge you basically whatever they want to. You either take it or not take it. They had enough demand. So they had minimum to no threat from competition. So therefore, they considered a price setter. They can set the price. So they control the price. This is in contrast. If you remember, we talked about target costing. Under target costing, you have no control over your price. Why? Because the price is set by the market. You're selling something that is not unique under target costing. Here you are selling something that's unique under those circumstances. What you do is you determine your full product cost, whatever your full product cost, then you add to it some desired profit. You know, you want to add to it 10% of your cost, 20% of your cost, you want to add to it 30% on your average asset, whatever you want to do. So to illustrate this point, let's work an example. So we have a company that produces 2,400 tablets and they desire profit 10% of assets, so they would like to take a look at their assets because their asset produces the tablets and based on their assets, they want to earn 10% of their assets. Well, let's start with their cost. Their variable cost per one tablet is $307.50. They produce 2,400 tablets. Their variable cost is $738,000. Their fixed cost is $226. Their full cost is $964,000. So now the way they're going to price their tablet is they're going to take their full cost and add to it whatever assets they have multiplied by 10%. They happen to have 2.5 million of average assets. They're going to multiply this by 10%. They can use any measurement they want to. They choose to use average asset. They could say we want to take the full cost times 150%. If they want to, whoever they want to, it's their desired profit. Now, obviously they have to be reasonable if they want to ask too much profit, then they will not sell a lot of products. So that's, you know, they will take into account other consideration. But the point is they determine the profit in addition to the cost. Here we go. So their target revenue is $1,214,000. They produce 2,400 tablets. Therefore, they're going to price the tablet at $506 per unit. And this $506 per unit would recover their cost plus it will give them the return of 10% of their average asset. So will the investors be happy? Well, if they're looking at 10% return, that's not a bad idea at all. So this is how we use the cost plus pricing, which is different than target costing. If you like these lectures, please like it. I do have many other lectures. And if you want to supplement your accounting finance courses, managerial accounting course, cost accounting course, your CPA exam, I strongly suggest you visit farhatlectures.com for additional resources. Good luck, study hard, and stay safe.