Question

Mathes Corporation manufactures paper products. The company operates a landfill, which it uses to dispose of nonhazardous trash. The trash is hauled from the two nearby manufacturing facilities in trucks that can carry up to four tons of trash in a load. The landfill operation requires certain preparation activities regardless of the amount of trash in a truck (i.e., for each load). The budget for the landfill for next year follows:

Volume of trash 1,200 tons (300 loads) Preparation costs (varies by loads) $ 66,000 Other variable costs (varies by tons) 66,000 Fixed costs 188,000 Total budgeted costs $ 320,000

Mathes is considering making the landfill a profit center and charging the manufacturing plants for disposal of the trash. The landfill has sufficient capacity to operate for at least the next 20 years. Other landfills are available in the area (both private and municipal), and each plant would be free to decide which landfill to use.

Required:

a. Compute the optimal transfer price.

b. Compute the total variable costs for a 3-ton load of trash from one of the plants. (Do not round intermediate calculations.)

Answer 1

a.Mathes should exchange at the Landfill's variable cost of getting and handling the material. Since the Landfill has overabundance limit in the wake of fulfilling all market request that exists for its administrations, tolerating loads from plants does not make it renounce any"profits" from outside organizations. On the off chance that plants pay variable costs, the Landfill is apathetic amongst tolerating and dismissing the business. Be that as it may, on the grounds that there are considerable settled expenses of running the Landfill, it is in the organization's best enthusiasm to persuade most extreme use of the current limit. The plants will have the best inspiration to utilize the inside Landfill as opposed to outside gatherings when the "cost" is set at variable cost.
The optimal transfer price is $55 per ton (= $66,000 ÷ 1,200 tons) plus $220 per load (= $66,000 ÷ 300 loads).
It is important to use a two-part transfer price.
A single price of $266.6 (= $320,000 ÷ 1,200 tons, for example) will provide no incentive to plant managers to send full trucks to the landfill, thereby increasing the number of loads and the costs of preparing the landfill.
b. Based on budgeted Landfill Costs
:Other Variable Costs$55 per ton  4 tons = 220
Preparation Costs$220 per load  1 load = 220
Total Variable Costs of Landfill Operations = $440