The Waterworks Department of the City of Pleasantville provides services to both the Parks and Recreation Department and the citizens of Pleasantville. Recently, a citizen has approached you to complain (nicely) about the wide variations in her water bills. The citizen’s household had consumed exactly 2,500 gallons of water each month, but the actual bill varied quite a bit. Looking into the matter, you discover the following:

1. March: As per normal patterns, the residents consumed 1.75 million gallons of water, and the P&R Department consumed 0.25 million gallons.

2. May: The city filled several large outdoor swimming pools with water in preparation for the summer. Thus the P&R Department consumed 750,000 gallons of water, raising total consumption to 3 million gallons. Usage by residents was also higher than normal at 2.25 million. You know that maximum usage almost never exceeds these levels.

3. December: The P&R Department was mostly shut down, reducing its usage to only 0.10 million gallons of water. Overall use by residents also dipped to 1.4 million gallons, perhaps because they were traveling for the holidays.

You discover that the City’s Water Department anticipates a periodic surge in demand (to fill pools, skating rinks, fight fires, and so on). Consequently, the City has installed capacity to process 3 million gallons of water per month. The City anticipates that residents would consume 1.75 million gallons on average, with a low of 1.4 million gallons and a high of 2.25 million gallons per month. Likewise, the P&R Department could consume anywhere from 0.1 to 0.8 million gallons per month.

The water treatment plant budgets for fixed costs of $30,000 per month and variable cost of 0.015 per gallon of water.

Required:

a. Calculate the resident’s bill for March, May, and December using actual usage and budgeted costs.

b. Repeat requirement (a) using dual rates. That is, allocate fixed costs based on maximum usage and variable costs based on actual usage.

c. Comment on the costs and benefits of using dual rates to determine the water bill mailed out to individual residents.