Third-Party Transfer Prices (L.Q.3): Vancouver Transit Ltd. (of Canada), operates a local mass transit system. The transit authority is a governmental agency and is related to the provincial government. Vancouver Transit has an agreement with the provincial government whereby it will provide rides to senior citizens at a fare of 10 cents per trip. The government will reimburse Vancouver Transit for the "cost" of each trip taken by a senior citizen. The regular fare is $1.00 per trip. After conducting an analysis of its costs. Vancouver Transit figured that with its operating deficit, the full cost of each ride on the transit system is $2.50. Routes, capacity, and operating costs are unaffected by the number of senior citizens on any route.

Required:

a. What are the alternative prices that could be used for determining the governmental reimbursement to Vancouver Transit?

b. Which price would Vancouver Transit prefer? Why?

c. Which price would the provincial government prefer? Why?

d. If Vancouver Transit provides an average of 200,000 trips for senior citizens in a given month, what is the monthly value of the difference between the prices in

b. and

c, above?