Question 2

The California Department of Transportation (CalTrans) is preparing a flexible budget for its new Express Lanes program in District 7. Using their Fastrak transponder, drivers can travel in the carpool-restricted HOV lanes at any hour of the day by paying an extra fee.

CalTrans wants to prepare a flexible budget for three levels of usage volume: Low, Medium and High. Annual revenue and cost data for each of the usage scenarios is presented in the table below.

	Low Usage	Medium Usage	High Usage
# of drivers using Express Lanes	300,000	400,000	500,000
Average annual revenue per driver using Express Lanes	$200	$150	$75
Variable cost per driver using Express Lanes	$20	$20	$20
Fixed expenses	$20,000,000	$20,000,000	$20,000,000
Step-fixed expenses	$5,000,000	$10,000,000	$15,000,000

1. Prepare a flexible budget for the District 7 Express Lanes program.

2. Which usage level results in the greatest surplus for CalTrans?
3. Which annual fee level would you recommend that CalTrans attempt to charge Express Lane drivers (choices are $200, $150 and $75)? Why?
4. One of the usage scenarios results in a projected deficit (use that fact to check your work above!). Briefly explain: (1) Why CalTrans might still pursue this option despite incurring a deficit, and (2) What financial or other factors would influence CalTranss decision whether to pursue this deficit option.
5. What is the marginal cost of serving the 400,000^th driver?

6. What is the average cost of serving 400,000 drivers?
7. Which cost should generally be used for reporting Express Lane financial results to the appropriate stakeholders? (Circle one)

Marginal Cost Average Cost

8. Which cost should generally be used for making financial decisions for the Express Lane program? (Circle one)

Marginal Cost Average Cost