ior of costs. The basic concept that in a given situation some costs are fixed while others are variable in relation to output is a reasonably simple one. To apply this concept in a particular situation, recognizing that the fixed or variable character of costs is related to time as well as to magnitude of changes in the output rate, and to understand that for decision-making purposes the concepts of fixed and variable costs must be geared to the particular proposal under consideration--such analysis, if the student is to master it, requires intensive training by means of a series of differing case situations, all revolving around the concept of fixed and variable costs. At various times one of the cases used in such a series has been that of the Conmay Company. This case was originally written for the course in Public Utility Management; subsequently it was used for a number of years in the course in Business Economics; more recently it has appeared in the course in Control.
The Conmay Company furnished local transportation for Hampton, Ohio, an industrial city with a population of about 100,000. The company's system, with 70 miles of track, used 9,300,000 kilowatt-hours of electricity annually. This was generated in the company's plant at a total annual cost of about $179,000. In 1922, the company was beginning to lose patronage because of the growing ownership of automobiles. The general manager, with a view to lowering expenses, suggested that the cost of power might be reduced by scrapping the power plant and purchasing energy from the station of the Hampton Power Company, which was less than a mile away.
The Hampton Power Company offered to enter into a cost-plus contract on terms which are described below. The general manager of the Conmay Company then undertook to determine the highest price at which the Conmay Company could afford to purchase its power.
On the basis of a coal cost of $6 a gross ton, a Conmay Company engineer computed the cost of power at the company's plant to be as shown in Exhibit 1.
The output of the Hampton Power Company's station, which supplied the city of Hampton and several neighboring communities, was about twice that of the Conmay Company. The generating equipment of the Hampton Power Company was ample to supply the Conmay Company's power needs, and was believed to be as reliable as that of the railway company. The average age of the Conmay Company's generators was 20 years.
The Conmay Company's load would increase the Hampton Power Company's output 50% and would lower its unit cost of production even if an additional generator had to be installed. The Hampton Power Company offered to take the Conmay Company's load at switchboard cost plus 20% for overhead and profit. Switchboard cost was defined as the actual average