Question

Carol manages the cafeteria at Mercy hospital. On an average month, Carol serves 18,000 meals. Her total monthly variable and fixed costs are $108,000 and $135,000, respectively. She charges individual wards (e.g., surgical, pediatrics) based on the number of meals consumed. The market price for a comparable meal is $12. a. What is Carol’s transfer price (the charge per meal) if she only recovers the variable costs? b. What is Carol’s transfer price per meal if she were to recover full cost? c. If the market price is the transfer price, calculate the profit or loss from the cafeteria. d. Why should the cost of the cafeteria be charged to the user departments? How is this information of use to the hospital management?

Answer 1

Answer:

a. Carol's transfer price is $6 per meal if she only recovers the variable costs.

b. $13,5 per meal

c. $27000 or a loss of $1.5 per meal.

d. The cost of the cafeteria should be charged to the user departments so that the actual profit or loss from each department can be valued

Explanation:

a. Variable costs = $108000 for 18000 meals.

Variable cost per meal = 108000 / 18000 = $6

Carol's transfer price is $6 per meal if she only recovers the variable costs.

b. If carol were to recover the full cost then the transfer price = Total cost / no. of meals

= (108000 + 135000) / 18000 = $13,5 per meal

c. If the transfer price is the market price i.e $12, the loss from the cafeteria = Revenue from meals - Total cost

= (18000 x 12) - (108000 + 135000)

= $27000 or a loss of $1.5 per meal.

d. The cost of the cafeteria should be charged to the user departments so that the actual profit or loss from each department can be valued.

This information is useful to the hospital management in knowing the actual costs of the meals consumed in the various departments and how the cost cutting measures can be implemented based on the cost of the different departments.