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	$	410,000
Operating costs—trucks		1,330,000
Other collection costs		330,000

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

	Households	Businesses
Number of customers	13,000	5,000
Waste collected (tons)	5,000	14,000

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?

	Price per pound

Answer 1

1. Calculation of price per pound charged by Evergreen for waste collection under current system ( Amount in $)

Particulars	Household	Business	Total
Waste collected in tons(1)	5000	14000	19000
Waste collected in pounds (1*2000)	10000000	28000000	38000000
Total customers	13000	5000	18000

Total Costs = Adm. Costs + operating costs + other collection costs = $410000+1330000+330000 = $ 2070000

Cost per pound = total costs / total wastage in pounds = 2070000/38000000 = 0.0544

Add: Margin @20% 0.0108

Price per pound 0.0652

2. Allocation of Costs to Households and business

Description		Household	Business	Total
Adm. Costs		296111.11	113888.89
		410000*13000/18000	410000*5000/18000
Operating costs		960555.55	369444.44
		1330000*13000/18000	1330000*5000/18000
Other collection costs		86842.10	243157.89
		330000*10000000/38000000	330000*28000000/38000000
Total		1343508.76	726491.22
Cost per customer		$103.35	$145.30
		$1343508.76/13000	726491.22/5000
Cost per pound		$0.1343	$0.0259
		$1343508.76/10000000	$726491.22/28000000
Add:Margin @20%		$0.02686	$0.0.0052
Price per pound		$0.1612	$0.0310