Evaluate Transfer Pricing System
Seattle Transit Ltd. operates a local mass transit system. The transit authority is a state governmental agency. It has an agreement with the state government to provide rides to senior citizens for 50 cents per trip. The government will reimburse Seattle Transit for the “cost” of each trip taken by a senior citizen.
The regular fare is $2 per trip. After analyzing its costs, Seattle Transit figured that with its operating deficit, the full cost of each ride on the transit system is $4. Routes, capacity, and operating costs are unaffected by the number of senior citizens on any route.
Required
a. What alternative prices could be used to determine the governmental reimbursement to Seattle Transit?
b. Which price would Seattle Transit prefer? Why?
c. Which price would the state government prefer? Why?
d. If Seattle Transit provides an average of 150,000 trips for senior citizens in a given month, what is the monthly value of the difference between the prices in (b) and (c)?
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