Peanut-butter costing, cross-subsidization. For many years, five former classmates— Steve Goodyear, Lola Gonzales, Rex King, Elizabeth Poffo, and Gary Young — have had a reunion dinner at the annual meeting of the American Accounting Association. The bill for the most recent dinner at the Seattle Spaceneedle Restaurant was broken down as follows:

Diner Entree Dessert Drinks Total Goodyear

$27 S8

$24 $59 Gonzales 24 3 0 27 King 21 6

13 40 Poffo 31 6 12 49 Young 15 4 6 25 For at least the last 10 annual dinne King put the total restaurant bill on his American Express card. He hen mailed to the othei ur a bill for the same amount (the average cost).

They shared the g ituih at the restaurant oaying cash. King continued this practice for the Seattle dinner. Ho\ ever, just before he sent t the bill to the other four diners, Young phoned him to complain, he was livid at Poffo for c ering the steak and lobster entree ("She always does that!") and at Goodyear for having three glasses of imported champagne ("What's wrong with domestic beer?").
Required 1. Why is the average cost approach in the context of the reunion dinner an example of peanut- butter costing?
2. Compute the average cost of the five diners. Who is undercharged and who is overcharged under the average cost approach? Is Young's complaint justified?
3. Give an example of a situation where King would find it more difficult to compute the amount of undercosting or overcosting than in requirement 2.
4. How might the behavior of the diners be affected if each person paid his or her own bill instead of continuing with the average cost approach?