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	$	416,000
Operating costs—trucks		1,360,000
Other collection costs		336,000

Data on customers for the most recent year are:

	Households	Businesses
Number of customers	13,600	6,200
Waste collected (tons)	5,600	15,200

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).

  

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)? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

b. Based on cost and waste data from the most recent year, complete the following table to determine the price per pound charged to households and to businesses by Evergreen for waste collection if the CEO's proposal were accepted? (Do not round intermediate calculations. Round your "Average allocated cost per pound" and "Price" answers to 4 decimal places.)

households business

allocated cost per customer

total allocated cost

average allocated cost per pound

price

Answer 1

a) Total costs:
Administrative costs	416000
Operating costs-trucks	1360000
Other collection costs	336500
Total costs	2112500
Total waste collected in pounds:
Households	12345887
Businesses	33510266
Total waste collected in pounds	45856153
Cost per pound	$                 0.046
Price charge per pound (cost * 120%)	$                 0.055
b)
Number of households	13600
Number of businesses	6200
Total customers	19800
Administrative and truck optg costs per customer
(416000+1360000)/19800	$            89.6970
Cost of collection per pound =336500/45856153 =	$              0.0073
ASSIGNMENT OF COSTS:	HOUSEHOLDS	BUSINESSES	TOTAL
Administrative and truck optg costs	$        1,219,879	$          556,121	$       1,776,000
Collection costs	$              90,596	$          245,904	$           336,500
Total assigned costs	$        1,310,475	$          802,025	$       2,112,500
Waste collected in pounds	12345887	33510266
Cost per pound	$              0.1061	$            0.0239
Price charge per pound (cost * 125%)	$              0.1327	$            0.0299