Valley Power Company uses natural gas to create steam to spin turbines to generate electricity. The costs of the power plant, including depreciation, taxes, and insurance, are fixed to generating electricity. The costs of operating personnel, maintenance, and fuel are variable to generating electricity. The fixed and variable costs are expressed in terms of costs per megawatt hour. A megawatt is 1 million watts generated per hour. A kilowatt is one thousand watts generated per hour. The fixed and variable costs per megawatt hour for Valley Power Company are:

Fixed cost per megawatt hour...........................$ 50

Variable cost per megawatt hour...........................80

Total cost per megawatt hour...........................$130

Valley Power Company runs gas turbines at 85% of capacity during the day and at 40% of capacity during the night. Daytime is considered peak demand time, while night is considered off-peak time. Industrial customers are charged $0.15 per kilowatt-hour, regardless of time of use. A new industrial customer is contracting for service from Valley Power. The new customer has the ability to move production to the night shift, and thereby shift electricity demand to the night hours. However, to accomplish this, the new customer expects a discounted price per kilowatt-hour.

A. Determine the operating income per megawatt hour for industrial customers.

B. Determine the contribution margin per megawatt hour for industrial customers.

C. What is the lowest price per kilowatt-hour that Valley Power could offer for off-peak power and maintain a positive contribution margin?

D. What are some other implications in offering a discounted off-peak price to the new customer?