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.
Required:
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 hospital management?