The motor pool of Megalopolis provides automobiles for the use of various city departments. Currently, the motor pool has 50 autos. A recent study showed that it costs $3,600 of annual fixed cost per automobile plus

$0.10 per kilometre variable cost to own, operate, and maintain autos such as those provided by the motor pool.

Each month, the costs of the motor pool are charged to the user departments on the basis of kilometres driven. On average, each auto is driven 24,000 kilometres annually, although wide month-to-month variations occur. In April 2006, the 50 autos were driven a total of 50,000 kilometres. The motor pool’s total costs for April were $24,000.

The chief planner for the city always seemed concerned about her auto costs. She was especially upset in April when she was charged $7,200 for the 15,000 kilometres driven in the department’s five autos. This is the normal monthly mileage in the department. Her memo to the head of the motor pool stated, “I can certainly get autos at less than the $0.48 per kilometre you charged in April.” The response was, “I am under instructions to allocate the motor-pool costs to the user departments. Your department was responsible for 30 percent of the April usage (15,000 kilometres + 50,000 kilometres), so I allocated 30 percent of the motor pool’s April costs to you (0.30 x $24,000). That just seems fair.”

1. Calculate the city’s average annual cost per kilometre for owning, maintaining, and operating an auto.

2. Explain why the allocated cost in April ($0.48 per kilometre) exceeds the average in requirement 1 above.

3. Describe any undesirable behavioural effects of the cost-allocation method used.

4. How would you improve the cost-allocation method?