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 25 percent above the average total cost of collection. Cost data for the most recent year of operations for Evergreen are as follows.

Administrative cost	407,000
Operating costs-trucks	1,315,000
Other collection costs	327,000

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

	Households	Businesses
Number of customers	12,700	4,400
Waste collected (tons)	4,700	13,400

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 $0.05 per pound (= $100 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 25 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)Same rate for both Customers:

In this case will first calculate total cost.

Administration Cost = 407000

Operating cost - trucks = 1315000

Other collection cost = 327000

Total cost = 2049000

Now we have to calculate total tones of waste collected.

From household = 4700 tons

From businesses = 13400 tons

Total= 18100 tons

Now we will calculate average cost of collection per ton:

total cost / total tons = 2049000 / 18100

= $113.20 / ton

Now we will add profit margin of 25 % to above rate: 113.20 + 25% = $141.5 per ton

So Price per pound = 141.5/2000 = $0.07075 (Approx   $0.07 per pound)

(B) Rate according to CEO proposal:

In this proposal we have alocate cost between household customer and business customer.

For that we will:

-allocate Admin cost on the basis of No.of customers.

-allocate operating cost of trucks on the basis of No.of customers.

-allocate other collection costs based on pounds collected.

	Household customers	Busimess customers	Total
N0. of customer	12700	4400	17100
Waste collected(Tons)	4700	13400	18100

Cost	Basis	Total cost	Household	Businesses
Admin cost	No. of customers	407000	302274.85	104725.15
Operating cost-trucks	No. of customers	1315000	976637.43	338362.57
Other collection costs	tons of waste collected	327000	84911.60	242088.40
Total cost			1363823.88	685176.12
per ton cost			290.175	51.133
per pound cost			0.145	0.026
Add:25 % profit margin			0.036	0.006
Rate per pound			0.181	0.032

So rate per pound :

For household cutomer : $ 0.181/pound

For business customer : $ 0.032/pound