Mathes Corporation manufactures paper products. The company operates a landfill, which it uses to dispose of nonhazardous trash. The trash is hauled from the two nearby manufacturing facilities in trucks that can carry up to 5 tons of trash in a load. The landfill operation requires certain preparation activities regardless of the amount of trash in a truck (i.e., for each load). The budget for the landfill for next year follows:

Volume of trash . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 tons (300 loads)

Preparation costs (varies by loads) . . . . . . . . . . . . . . . . . . . . . $ 45,000

Other variable costs (varies by tons) . . . . . . . . . . . . . . . . . . . . . 45,000

Fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000

Total budgeted costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$200,000

Mathes is considering making the landfill a profit center and charging the manufacturing plants for disposing of the trash. The landfill has sufficient capacity to operate for at least the next 20 years.

Other landfills are available in the area (both private and municipal), and each plant would be free to decide which landfill to use.

Required

a. What transfer pricing rule should Mathes implement at the landfill so that its plant managers would independently make decisions regarding landfill use that would be in the company’s best interests?

b. Illustrate your rule by computing the transfer price that would be applied to a 4-ton load of trash from one of the plants.