Question

2-47. Cost Allocation and Regulated Prices

This is a cost accounting accounting question

The City of Imperial Falls contracts with Evergreen Waste Collection to provide solid waste collection to households and businesses. Until recently, Evergreen had anexclusive 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 poundof 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 asfollows:

Administrative cost . . . . . . . . . . . . . . . . . . . . . $200,000
Operating costs—trucks . . . . . . . . . . . . . . . . . 640,000
Other collection costs . . . . . . . . . . . . . . . . . . . 160,000
Households Businesses
Number of collection points . . . . . . . . . 8,000 2,000
Waste collected (tons) . . . . . . . . . . . . . 2,500 7,500

Data on customers for the most recent year are:
The City Council of Imperial Falls is considering allowing other private waste haulers to collect waste from businesses, but not from households. Service to businessesfrom other waste collection firms would not be subject to price regulation. Based on information from neighboring cities, the price that other private waste collectionfirms 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 resultin different rates for households and businesses. She proposes that administrative costs and truck operating costs be allocated based on the number of customers andthe 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 determinedusing 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 bothtypes of customers)?

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