Question

The City of Imperial Falls contracts with Evergreen Waste Collection to provide solid waste collection to households and businesses. Until recently, Evergreen had an exclusive franchise to provide this service in Imperial Falls, which meant that other waste collection firms could not operate legally in the city. The price per pound of waste collected was regulated at 20 percent above the average total cost of collection.

Cost data for the most recent year of operations for Evergreen are as follows.
  

Administrative cost	$	418,000
Operating costs—trucks		1,370,000
Other collection costs		338,000

Data on customers for the most recent year are as follows.

	Households	Businesses
Number of customers	13,800	6,600
Waste collected (tons)	5,800	15,600

The City Council of Imperial Falls is considering allowing other private waste haulers to collect waste from businesses, but not from households. Service to businesses from other waste collection firms would not be subject to price regulation. Based on information from neighboring cities, the price that other private waste collection firms will charge is estimated to be $0.04 per pound (= $80 per ton). (1 ton = 2,000 pounds)

  

Evergreen's CEO has approached the city council with a proposal to change the way costs are allocated to households and businesses, which will result in different rates for households and businesses. She proposes that administrative costs and truck operating costs be allocated based on the number of customers and the other collection costs be allocated based on pounds collected. The total costs allocated to households would then be divided by the estimated number of pounds collected from households to determine the cost of collection. The rate would then be 20 percent above the cost. The rate for businesses would be determined using the same calculation.

Required:

a. Based on cost data from the most recent year, what is the price per pound charged by Evergreen for waste collection under the current system (the same rate for both types of customers)?

b. Based on cost and waste data from the most recent year, what would be the price per pound charged to households and to businesses by Evergreen for waste collection if the CEO’s proposal were accepted?

Answer 1

a.	Total cost:
				$
	Administrative cost			418,000
	Operating costs—trucks			1,370,000
	Other collection costs			338,000
	Total cost			2,126,000
				Households	Businesses	Total
	Waste collected (tons)			5800	15600
	Waste collected (pounds)			11600000	31200000	42800000
				(5800*2000)	(15600*2000)
	Cost per pound=Total cost/Total waste collected (pounds)=2126000/42800000=0.0497
	Price per pound:
				$
	Cost per pound			0.0497
	Add: Markup at 20%			0.0099
	Price per pound			0.0596
b.	Cost allocation:
				Households	Businesses	Total
	Administrative cost			282764.7059	135235.2941	418000
	(Based on number of customers)			418000*(13800/20400)	418000*(6600/20400)
	Operating costs—trucks			926764.7059	443235.2941	1370000
	(Based on number of customers)			1370000*(13800/20400)	1370000*(6600/20400)
	Other collection costs			91607.4766	246392.5234	338000
	(Based on pounds collected)			338000*(116/428)	338000*(312/428)
	Total allocated cost		a	1301136.8884	824863.1116	2126000
	Number of customers		b	13800	6600
	Allocated cost per customer (a/b)			94.2853	124.9793
	Waste collected (pounds)           c			11600000	31200000
	Average allocated cost per pound (a/c)			0.1122	0.0264
	Add: Markup at 20%			0.0224	0.0053
	Price per pound			0.1346	0.0317