$9-44.$ COST ALLOCATION, DOWNWARD DEMAND SPIKAL. Cate

One operates a chain of $10$ hospitals in the Los Angeles area. Its central food$-$catering facility, Cafeman, prepares and delivers meals to the hospitals. It has the capacity to deliver up to $1,025,000$ meals a year. In $2020,$ based on estimates from each hospital controller, Cafeman budgeted for $925,000$ meals that year. Budgeted fixed costs in $2020$ were $$1,517,000.$ Each hospital was charged $$6\mathrm{.}04$ per meal $-$$$4\mathrm{.}40$ variable costs plus $$1\mathrm{.}64$ allocated budgeted fixed cost.

Recently, the hospitals have been complaining about the quality of Cafeman's meals and their rising costs. In mid$-2020,$ Cafe One's president announces that all Cafe One hospitals and support facilities will be run as profit centers. Hospitals will be free to purchase qualitycertified services from outside the system. Luke Hayward, Cafeman's controller, is preparing the $2021$ budget. He hears that three hospitals have decided to use outside suppliers for their meals, which will reduce the $2021$ estimated demand to $820,000$ meals. No change in variable cost per meal or total fixed costs is expected in $2021.$

Required

How did Hayward calculate the budgeted fixed cost per meal of $$1\mathrm{.}64$ in $2020?$

Using the same approach to calculating budgeted fixed cost per meal and pricing as in $2020,$ how much would hospitals be charged for each Cafeman meal in $2021?$ What would the reaction of the hospital controllers be to the price?

Suggest an alternative cost$-$based price per meal that Hayward might propose and that might be more acceptable to the hospitals. What can Cafeman and Hayward do to make this price profitable in the long run?