Solution Manual, Managerial Accounting Hansen Mowen 8th Editions_ch 17

CHAPTER 17 ENVIRONMENTAL COST MANAGEMENT QUESTIONS FOR WRITING AND DISCUSSION 1. Firms are interested in environmental costing because the costs of complying with environmental regulation have increased and because improving environmental performance can reduce costs and provide a competitive advantage. 2. Ecoefficiency is the belief that organizations can produce more goods and services while simultaneously reducing negative environmental consequences, resource consumption, and costs. 3. The six incentives, or causes, for ecoefficiency are (1) customers desire to buy clean goods, (2) better employees and greater productivity, (3) lower cost of capital and cheaper insurance, (4) societal benefits and improved image, (5) innovations and searches for new opportunities, and (6) cost reductions and increased competitiveness. 4. An environmental cost is a cost incurred because poor environmental quality exists or may exist. 5. The four categories of environmental costs are prevention, detection, internal failure, and external failure. Prevention costs are costs incurred to prevent degradation to the environment. Detection costs are incurred to determine if the firm is complying with environmental standards. Internal failure costs are costs incurred to prevent emission of contaminants to the environment after they have been produced. External failure costs are costs incurred after contaminants have been emitted to the environment. 6. Realized external failure costs are environmental costs paid for by the firm. Unrealized or societal costs are costs caused by the firm but paid for by third parties (members of society bear these costs). 7. Full environmental costing means that all environmental costs are assigned to the product, including societal costs. Full private costing means that only private costs are assigned to products.

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8. Functional-based costing must first isolate the environmental costs and assign them to an environmental costing pool. Next, a pool rate is computed using direct labor hours or machine hours (or some other unit-level driver). Finally, the rate is used to assign environmental costs to products based on their usage of direct labor hours or machine hours. The approach breaks down when there is product diversity because unit-level drivers would not likely reflect the environmental resources being consumed by each product. 9. Activity-based costing first identifies environmental activities and determines the cost of each activity. Next, activity rates are computed. Finally, environmental costs are assigned to each product based on their consumption of individual environmental activities. 10.

The environmental cost per unit of product signals two things. First, it indicates how much opportunity exists for improving environmental and economic performance. Second, it is a measure of the relative cleanliness of products. The “more dirty” products should receive greater attention than the ones that are “more clean.”

11.

Life-cycle assessment is an approach that identifies the environmental consequences of a product through its entire life cycle and then searches for opportunities to obtain environmental improvements.

12.

The environmentally important life-cycle stages of a product are resource extraction, product manufacture, product use, and recycling and disposal.

13.

The three steps of life-cycle assessment are inventory analysis, impact analysis, and improvement analysis. Inventory analysis specifies the materials and inputs needed and the resulting environmental releases in the form of solid, liquid, and gaseous residues. Impact analysis assesses the envi-

ronmental effects of competing designs and provides a relative ranking of those effects. Improvement analysis has the objective of reducing the environmental impacts revealed by the inventory and impact steps. 14.

15.

Life-cycle costing improves life-cycle assessment by assigning economic consequences to the environmental impacts identified in the inventory and impact steps. Assessing the financial consequences allows competing designs to be compared on a common measure, allowing an environmental ranking of competing designs. The justification for adding an environmental perspective to the Balanced Scorecard is based on the concept of ecoefficiency. If ecoefficiency is a valid concept, then adding an environmental perspective is legitimate because improving environmental performance can be the source of a competitive advantage.

16.

The five core objectives of the environmental perspective are: (1) to minimize the use of hazardous materials; (2) to minimize the use of raw or virgin materials; (3) to minimize energy requirements for production and use of the product; (4) to minimize the release of solid, liquid, and gaseous residues; and (5) to maximize opportunities to recycle.

17.

Minimizing the use of raw materials is an environmental issue because many raw materials are limited in quantity and are nonrenewable. For example, only a finite amount of petroleum reserves exists. Thus, conserv-

582

ing their use ensures that future generations will have access to them. 18.

Possible measures for minimizing the release of residues include pounds of toxic materials, cubic meters of effluents, tons of greenhouse gases produced, and percentage reduction of packaging materials.

19.

Agree. Assuming the concept of ecoefficiency is valid, then all environmental failure activities should be classified as nonvalueadded. These activities represent the consequences of inefficient production approaches, and adopting more efficient approaches can eliminate the need for these types of activities.

20.

Design for the environment means that efforts are made to design products and processes to minimize environmental degradation. This approach covers the entire life cycle and affects products, processes, materials, energy, and recycling.

21.

The value of financial measures of environmental performance is easy to identify: environmental improvements should produce significant and favorable financial consequences. If ecoefficient decisions are being made, then environmental costs should decrease as environmental performance improves. Examples of financial measures include hazardous materials as a percentage of total materials cost, cost of energy usage (and the trend), total internal failure costs, total external failure costs, prevention costs, and detection costs.

EXERCISES 17–1 1. 2. 3. 4. 5. 6. 7. 8.

d e d a e c b e

9. 10. 11. 12.

a e d b

17–2 1.

The idea that economic efficiency is equivalent to pollution is a myth. Quite the opposite appears to be true. Ecoefficiency means that more goods and services can be produced while simultaneously reducing negative environmental impacts. Ecological and economic performance can and should be complementary. Several factors support this view. First, customers are demanding cleaner products. Second, better employees prefer to work for environmentally clean firms. Third, environmentally responsible firms tend to capture external benefits such as lower cost of capital and lower insurance rates. Fourth, improving environmental performance produces significant social benefits and enhances the ability to sell products and services. Fifth, improving environmental performance awakens within managers a need to innovate. Sixth, improving environmental performance reduces environmental costs and may create a competitive advantage.

2.

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their needs. To believe that the state has exclusive responsibility for solving environmental problems and fostering sustainable development ignores the role of ecoefficiency. If improving environmental performance improves economic efficiency, then firms have an incentive to solve environmental problems. Ecoefficiency is compatible with, and supportive of, sustainable development. Assuming that ecological and economic efficiency are compatible, then the role of government is to encourage and foster the market forces that will lead to improved environmental quality.

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17–3 1.

External failure costs for the environmental model are made up of two categories: those paid for by the firm and those paid for by a third party (society). In the TQM model, all external failure costs are assumed to be paid for by the firm.

2.

The external failure cost curve is simply the horizontal axis because the firm pays for nothing. The total cost curve is the control cost curve (the sum of preventive and detection costs). The incentive is to degrade as much as possible to lower control costs. Thus, the optimal operating point from the firm’s perspective is total pollution because all external failure costs are paid for by someone else. Ecoefficiency has no meaning in this extreme case. The role of government here is to convert the externalities to private costs. Regulation is required to enable ecoefficiency—to make it an operable concept.

17–4 1. 2. 3. 4. 5. 6. 7. 8.

9. 10. 11. 12. 13. 14. 15. 16.

Prevention (SD) Prevention (SD) Internal failure (SD) External failure (societal) Detection (SD) Prevention (SD) Detection External failure (societal)

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Detection (SD) External failure (societal) Prevention (SD) External failure (private) Internal failure (SD) Detection (SD) Internal failure Detection (SD)

17–5 1.

Lemmons Pharmaceuticals Environmental Cost Report For the Year Ended December 31, 2008 Environmental Costs Prevention costs: Environmental studies Environmental training

$

240,000 150,000

Detection costs: Testing for contamination $ 1,200,000 Measuring contamination levels 120,000 Internal failure: Treating toxic waste Operating equipment Maintaining equipment

$ 9,600,000 1,970,000 720,000

External failure: Inefficient materials usage Cleanup of soil Totals

$ 2,400,000 3,600,000

$

390,000

Percentage* 0.33%

1,320,000

1.10

12,290,000

10.24

6,000,000 $20,000,000

5.00 16.67%**

*Of operating costs ($120,000,000) **Rounded 2.

Relative percentages (rounded): Prevention: Detection: Internal failure: External failure:

0.33% / 16.67% 1.10% / 16.67% 10.24% / 16.67% 5.00% / 16.67%

= 2.00% = 6.60% = 61.40% = 30.00%

This distribution reveals that the company is paying little attention to preventing and detecting environmental costs. To improve environmental performance, much more needs to be invested in the prevention and detection categories.

585

17–5 3.

Concluded

Both items should be added to the external failure category in the report. The first item would add $2,100,000 and is a private cost. The second adds $4,800,000 and is a societal cost. The amount reported for this category would then become $12,900,000, and the total environmental cost would increase to $26,900,000. Under a full-costing regime, the entire $6,900,000 should be included in the report. Often, however, only private costs will be included.

17–6 1.

Activity rates: Packaging rate: Energy rate: Toxin release rate: Pollution rate:

$5,400,000/5,400,000 $1,440,000/1,800,000 $720,000/3,600,000 $1,680,000/600,000

= = = =

$1.00 per pound $0.80 per kilowatt-hour $0.20 per pound $2.80 per machine hour

Unit cost: Herbicide Packaging: $1.00 × 3,600,000 $1.00 × 1,800,000 Energy: $0.80 × 1,200,000 $0.80 × 600,000 Toxin releases: $0.20 × 3,000,000 $0.20 × 600,000 Pollution control: $2.80 × 480,000 $2.80 × 120,000 Total Unit cost per pound

Insecticide

$ 3,600,000 $ 1,800,000 960,000 480,000 600,000 120,000 1,344,000 $ 6,504,000 ÷ 12,000,000 $ 0.542

336,000 $ 2,736,000 ÷ 30,000,000 $ 0.0912

The herbicide has the highest environmental cost per unit. So, to the extent that the per-unit environmental cost measures environmental damage, we can say that this product causes more problems than the insecticide.

586

17–6

Concluded

2.

Excessive usage of materials and energy is classified as an external failure cost (once too much is used, then customers and society bear the cost—the effect has been “released” into the environment).

3.

These costs would increase the toxin release rate by $0.90 per pound ($3,240,000/3,600,000). This increase, in turn, would increase the amount assigned to each product: $2,700,000 to the herbicide and $540,000 to the insecticide. Unit costs, then, would increase by $0.225 for the herbicide ($2,700,000/12,000,000) and $0.018 for the insecticide ($540,000/30,000,000). This is a “full-costing” approach, which many feel ought to be the way environmental costs are assigned. However, it is often difficult to estimate the societal costs, and many firms restrict their cost assignments to private costs.

17–7 1.

New activity rates: Packaging rate: Energy rate: Toxin release rate: Pollution rate: Engineering rate: Treatment rate:

$2,430,000/4,860,000 $960,000/1,200,000 $180,000/1,800,000 $1,680,000/600,000 $720,000/24,000 $486,000/4,860,000

= $0.50 per pound = $0.80 per kilowatt-hour = $0.10 per pound = $2.80 per machine hour = $30 per engineering hour = $0.10 per pound

Note: Since pounds of packaging is the driver for both packaging and packaging treatment, the rates could be combined. The treatment rate could be part of the packaging rate (giving a total rate of $0.60 per pound). The 4,860,000 pounds used for the rate is 90% of the original 5,400,000 pounds.

587

17–7

Continued

Unit cost: Herbicide Packaging and treatment: $0.60 × 3,240,000 $0.60 × 1,620,000 Energy: $0.80 × 800,000 $0.80 × 400,000 Toxin releases: $0.10 × 1,500,000 $0.10 × 300,000 Pollution control: $2.80 × 480,000 $2.80 × 120,000 Engineering: $30 × 18,000 $30 × 6,000 Total Unit cost per pound

Insecticide

$ 1,944,000 $

972,000

640,000 320,000 150,000 30,000 1,344,000 336,000 540,000 $ 4,618,000 ÷ 12,000,000 $ 0.3848**

180,000 $ 1,838,000 ÷ 30,000,000 $ 0.0613**

**Rounded 2.

Savings:

Before* After Total savings Pounds Unit savings

Herbicide $ 6,504,000 4,618,000 $ 1,886,000 ÷ 12,000,000 $ 0.1572**

Insecticide $ 2,736,000 1,838,000 $ 898,000 ÷ 30,000,000 $ 0.0299**

Total $9,240,000 6,456,000 $2,784,000

*See the solution to Exercise 17-6. **Rounded This illustrates that improving environmental performance can improve economic efficiency, consistent with the claims of ecoefficiency.

588

17–7

Concluded

3.

Excessive energy and materials usage and releasing toxins are external failure activities; operating pollution control equipment is an internal failure activity. Engineering is a prevention activity (added during the improvement process).

4.

The environmental improvements have reduced total and per-unit operating costs for each product. This now makes price reductions possible, reducing customer sacrifice and potentially creating a competitive advantage. The reduced environmental damage may also increase product and company images, with the potential of attracting more customers. Other possible benefits that may contribute to a competitive advantage include a lower cost of capital and lower insurance costs.

17–8 1.

Both use about the same quantity of primary raw materials; however, tallow is a renewable resource, whereas petrochemical stocks are not. Thus, an environmental advantage on this dimension belongs to tallow. Water usage, though, offsets some of this advantage. Tallow requires a much heavier usage of water (10 times the amount). Although water is renewable, it is also a limited resource and has a number of competing uses. Energy usage is in favor of tallow, but only slightly (120 total kilowatt-hours versus 135 for petrochemicals). Emissions to the environment are more difficult to assess. Two are in favor of petrochemicals and two in favor of tallow. There is insufficient information to evaluate the relative damage caused by each type of contaminant. Thus, at this point, it is difficult to determine which of the two is more environmentally friendly. One might try the tallow approach and argue that it is more compatible with the concept of sustainable development. Using tallow may preserve more petrochemical stocks for future generations—why use the petrochemical stock approach when it is unnecessary and it contributes to the depletion of a scarce resource?

589

17–8 2.

Continued

Environmental impact cost: Petrochemical Raw materials: $0.40 × 990 $0.60 × 935 Water: $0.50 × 56 $0.50 × 560 Energy: $1.20 × 135 $1.20 × 120 Contaminants: Air: $500 × 9* $500 × 9* Liquid: $60 × 7** $60 × 5 Solid: $20 × 87 $20 × 176 Cost per 1,000 kg

$

Tallow

396 $

561

28 280 162 144 4,500 4,500 420 300 1,740 $ 7,246

3,520 $ 9,305

*45/5 =9 **If dumped, the cost doubles. The lowest cost is assumed. The petrochemical approach has the lowest environmental cost per unit. Using cost as a summary index, the petrochemical approach should be chosen. Cost is limited as a summary measure because it often reflects only private costs. In this case, more than private costs should be reflected. For example, there is no indication that societal costs are reflected in the costs of contaminants. Further, there is a societal benefit from using tallow instead of petrochemicals because it is a renewable resource. This also is not reflected in the summary cost measure. Estimating these two effects and including them would strengthen the measure.

590

17–8 3.

Concluded

Suppliers control production of the raw materials and the usage of water and energy in their production. The producer controls the usage of the raw materials and packaging, energy associated with processing and transportation, and the emission of the contaminants during production. The producer also has the ability to influence the recyclability and disposability of the product. There is no explicit information concerning packaging, product use and maintenance, recycling, and disposal. These factors are also significant issues. The biodegradability of the surfactants, for example, is something that ought to be explored.

17–9 1.

Pounds demanded = 375,000,000/5 = 75,000,000. Thus, the demand for paperboard is reduced 300,000,000 pounds. At $0.75 per pound, this saves the company $225,000,000 per year. Recycling saves 75,000,000 × 0.90 = 67,500,000 pounds. Thus, 67,500,000 pounds of landfill are avoided per year. When the recycling pounds are added to the reduction in demand, the total amount is 367,500,000 pounds. If one tree is equivalent to 300 pounds of paperboard, then 367,500,000/300 = 1,225,000 trees are saved.

2.

Savings from weight reduction: In total: In dollars:

0.5 × 250,000,000 = 125,000,000 ounces saved or 125,000,000/16 = 7,812,500 pounds of packaging materials saved At $0.025 per ounce, $3,125,000 per year is saved in packaging costs.

Seal reduction savings: Per package: 0.05 × 2 = 0.1 ounces In total: 0.10 × 250,000,000 = 25,000,000 ounces saved or 25,000,000/16 = 1,562,500 pounds In dollars:

$0.025 × 25,000,000 = $625,000 per year

591

17–9

Concluded

3.

Ultimate disposal can affect the usage of land, energy, and material resources and also has the potential of contaminating land, water, and air. Disposal by recycling reduces the demand for primary resources. Disposal by safe incineration (designed to avoid the release of damaging contaminants) can reduce the demand for nonrenewable energy resources and replace some of the energy used to produce the packaging. Using landfills to dispose of the product ties up the land and creates potential contamination (e.g., methane gas released into the air by anaerobic decay of organic waste).

4.

Possible reasons: (1) Rate of usage is greater than the rate of replacement, (2) Resources are limited by alternative uses (e.g., national parks), and (3) Resources are freed up for alternative uses.

17–10 a. b. c. d. e. f. g. h. i. j. k. l. m.

Minimize release of residues Minimize hazardous materials Maximize opportunities to recycle Minimize energy requirements Minimize raw or virgin materials Minimize release of residues Maximize opportunities to recycle Minimize release of residues Minimize hazardous materials Minimize raw or virgin materials Minimize release of solid residues (also raw materials) Minimize release of residues Maximize opportunities to recycle

592

17–11 1.

Ecoefficiency maintains that pollution equals productive inefficiency. Thus, improving environmental performance should increase productive efficiency. Increasing productive efficiency may create a competitive advantage. A perspective is justified if it is the source of a competitive advantage.

2.

The activities are all concerned with the learning and growth perspective. By investing in an environmental management system (ISO 14001 registration) and improving the environmental information system, the environmental infrastructure is enhanced. The cost of ISO 14001 is a prevention cost, and the development of environmental measurements is a detection cost. Auditing the report has to do with the quality of measurement and thus could be classified as a detection cost.

3.

Number of Registrations

ISO 14001 Registrations 30 24

25 20

15

15 9

10 5

3

0 2005

2006

2007

Year Registrations

593

2008

17–11 Continued Energy Consumption 3,050 3,000

3,000 2,950

BTUs

2,950

2,900

2,900

2,850

2,850 2,800 2,750 2005

2006

2007

2008

Year BTU (in billions)

Greenhouse Gases 41,000 40,000

40,000 39,000

Tons

39,000

38,000

38,000 37,000

36,000

36,000 35,000 34,000 2005

2006

2007

Year Gases (in tons)

594

2008

17–11 Concluded Henderson has made significant progress on all three dimensions. Eighty percent of the facilities are ISO 14001 registered, energy consumption has dropped by 5 percent over the four-year period, and greenhouse gases have declined by 10 percent over the four years. The company has not registered all 30 facilities by 2008 as planned (only 80 percent were registered). Whether the other outcomes are in line with the targets set by the company for the four-year period is unknown, since no targets are given. BTUs are associated with the objective to minimize energy usage, and tons of greenhouse gases are associated with the objective to minimize release of contaminants. The number of facilities registered may be better classified with the objective of increasing environmental capabilities and be located within the learning and growth perspective. ISO 14001 is concerned with putting into place an environmental management system and thus is concerned with all core objectives.

17–12 1. Cost Trend as a Percentage of Sales 0.14

Costs/Sales

0.12

0.12 0.1

0.10

0.08

0.08

0.07

0.06 0.04 0.02 0.00 2005

2006

207

2008

Year

Costs/Sales

There appears to be a favorable trade-off between prevention and detection activities and failure activities. Ecoefficiency seems to be working.

595

17–12 Concluded 2.

Normalized Energy Consumption 12,500

BTUs/Sales

12,000

12,000

11,800

11,500 11,000

10,545

10,500

10,364

10,000 9,500 2005

2006

2007

2008

Year BTUs/Sales

Energy consumption has dropped from 12,000 BTUs per sales dollar to 10,364 BTUs per sales dollar, a 13.63 percent improvement [(12,000 – 10,364)/12,000]. This compares with a 5 percent improvement for the measure that is not normalized. The 13.63 percent is a more meaningful measure because it reflects the need to increase energy consumption as output increases.

596

PROBLEMS 17–13 1.

Environmental benefits:

•

Ozone-depleting substances: external failure

•

Hazardous waste disposal: external failure

•

Hazardous waste materials: internal failure

•

Nonhazardous waste disposal: external failure

•

Nonhazardous waste materials: internal failure

•

Recycling materials: prevention

•

Excessive energy usage: internal and external failure

•

Excessive packaging: external failure

In all cases except for recycling, the underlying reduction activities should be largely prevention with some detection requirements. This reveals the importance of prevention in the ecoefficiency model (remind students of the 1-10100 rule). Environmental costs:

•

Corporate level: prevention

•

Auditor fees: prevention and detection

•

Environmental engineering: a cost that likely would be split among activities in four categories (using, for example, resource drivers)

•

Professionals: all four categories

•

Packaging: prevention

•

Pollution controls, operations and maintenance: internal failure

•

Pollution controls, depreciation: internal failure

•

Attorney fees: external failure

•

Settlements: external failure

•

Waste disposal: external failure

•

Environmental taxes: external failure

•

Remediation, on-site: internal failure

•

Remediation, off-site: external failure

597

17–13 Concluded 2.

•

Ozone-depleting substances: pounds (tons) released; objective: minimize release of residues

•

Hazardous waste disposal: tons of residues landfilled; objective: minimize hazardous waste

•

Hazardous waste materials: pounds (tons) produced; objective: minimize hazardous waste

•

Nonhazardous waste disposal: tons sent to landfills; objective: minimize raw materials

•

Nonhazardous waste materials: Pounds of waste/pounds of materials issued; objective: minimize raw materials

•

Recycling materials: pounds of materials recycled; objective: maximize opportunities to recycle

•

Energy usage: kilowatts, BTUs; objective: minimize energy consumption

•

Packaging: pounds of packaging; objective(s): minimize raw materials and minimize residues

Note: Packaging actually affects several objectives. By reducing the weight of packaging, less materials are used, and raw materials are minimized. By reducing the weight, less landfill is required, reducing the solid waste. Increasing the recyclability also reduces solid waste and demand for raw materials. Finally, if the packaging can be incinerated, it may produce energy and reduce the use of nonrenewable energy sources. 3.

Investing in prevention and detection activities should decrease the costs of failure activities. Furthermore, if ecoefficiency is a true concept, then the reductions in failure costs should exceed the costs of prevention. That is, it is more efficient to be environmentally responsible.

598

17–14 1.

2.

2006

2007

2008

Environmental benefits: Ozone-depleting substances, cost reductions

$960,000

$1,600,000

$2,560,000

Environmental costs: Engineering design

1,280,000

640,000

80,000

In 2006, the cost reductions were less than the design cost. However, in the following year, the cost reduction achieved matched the design cost, and the reductions achieved in the prior year are costs avoided in 2007 as well. Thus, the total savings are $1,600,000, the sum of last year’s ($960,000) plus this year’s ($640,000). In 2006, the design costs are $80,000, and the pollution costs are reduced by an additional $960,000. Thus, the total savings per year now amount to $2,560,000 (the sum of the current-year savings plus the costs avoided from improvements of prior years). How much is an annuity of $2,560,000 worth? Certainly more than the $2,160,000 paid for engineering design activity in 2005, 2006, 2007, and 2008! This seems to support ecoefficiency: improving environmental performance improves economic efficiency.

599

17–15 1.

Avade Company Environmental Financial Statement For the Year Ended December 31, 2008 Environmental benefits: Income: Recycling income ........................................................... Increased sales .............................................................. Current savings: Cost reductions, hazardous waste ............................... Cost reductions, contaminant releases ....................... Cost reductions, scrap production .............................. Cost reductions, pollution equipment ......................... Energy conservation savings ....................................... Remediation savings ..................................................... Reduced insurance and finance costs ......................... Ongoing savings: Cost reductions, hazardous waste ............................... Cost reductions, contaminant releases ....................... Cost reductions, scrap production .............................. Cost reductions, pollution equipment ......................... Energy conservation savings ....................................... Remediation savings ..................................................... Total benefits ............................................................

600

$ 200,000 1,600,000 800,000 1,200,000 200,000 640,000 144,000 880,000 640,000 400,000 800,000 200,000 400,000 144,000 800,000 $9,048,000

17–15 Concluded Environmental costs: Prevention: Designing processes and products Training employees Detection: Measuring contaminant releases Inspecting processes Internal failure: Producing scrap Operating pollution equipment External failure: Disposing of hazardous waste Releasing air contaminants Using energy Remediation Total costs 2.

$ 800,000 320,000 560,000 640,000 1,000,000 1,040,000 400,000 2,000,000 1,152,000 1,520,000 $9,432,000

The total environmental costs in 2006 were $14,280,000. The total costs in 2008 were $9,432,000, a significant decrease. Adding to this the fact that sales increased because of an improved environmental image, financing and insurance costs decreased, and recycling income increased, then there is strong evidence of increased efficiency. Moreover, the ratio of benefits to costs in 2006 is approaching one. Thus, ecoefficiency is working, and the firm is strengthening its competitive position.

17–16 1.

Activity rates: Hazardous waste: Measurement: Contaminants: Scrap: Equipment: Designing: Energy: Training: Remediation:

$2,400,000/2,400 = $1,000 per ton $120,000/60,000 = $2 per transaction $6,000,000/3,000 = $2,000 per ton $2,100,000/600,000 = $3.50 per pound $3,120,000/6,240,000 = $0.51 per hour $600,000/24,000 = $25 per hour $2,160,000/21,600,000 = $0.10 per BTU $120,000/1,200 = $100 per hour $4,800,000/240,000 = $20 per hour

601

17–16 Continued Unit cost calculation (2006): Luxury Model Hazardous waste: $1,000 × 240 $1,000 × 2,160 Measurement: $2 × 12,000 $2 × 48,000 Contaminants: $2,000 × 300 $2,000 × 2,700 Scrap: $3.50 × 300,000 $3.50 × 300,000 Equipment: $0.50 × 1,440,000 $0.50 × 4,800,000 Designing: $25 × 18,000 $25 × 6,000 Energy: $0.10 × 7,200,000 $0.10 × 14,400,000 Training: $100 × 600 $100 × 600 Remediation: $20 × 60,000 $20 × 180,000 Total cost Units Unit cost

$

Standard Model

240,000 $

2,160,000

24,000 96,000 600,000 5,400,000 1,050,000 1,050,000 720,000 2,400,000 450,000 150,000 720,000 1,440,000 60,000 60,000 1,200,000 $5,064,000 ÷ 2,400,000 $ 2.11

3,600,000 $ 16,356,000 ÷ 3,600,000 $ 4.54*

*Rounded The unit cost information provides an index of the environmental performance of each product. It thus can serve as a benchmark for evaluating subsequent efforts to improve environmental performance. The unit environmental cost also provides some indication as to where environmental improvement activities should be focused.

602

17–16 Continued 2.

2006 unit cost for the three relevant items: Luxury Model Hazardous waste: $1,000 × 240 $1,000 × 2,160 Contaminants: $2,000 × 300 $2,000 × 2,700 Equipment: $0.50 × 1,440,000 $0.50 × 4,800,000 Total Units Unit cost

Standard Model

$ 240,000 $ 2,160,000 600,000 5,400,000 720,000 $1,560,000 ÷ 2,400,000 $ 0.65

2,400,000 $ 9,960,000 ÷ 3,600,000 $ 2.77*

Luxury Model

Standard Model

2008 unit cost for the three relevant items: Hazardous waste: $1,000 × 120 $1,000 × 480 Contaminants: $2,000 × 150 $2,000 × 1,350 Equipment: $0.50 × 720,000 $0.50 × 2,400,000 Total Units Unit cost

$ 120,000 $

480,000

300,000 2,700,000 360,000 $ 780,000 ÷ 2,400,000 $ 0.33*

1,200,000 $ 4,380,000 ÷ 3,600,000 $ 1.22*

Note: The activity rates are calculated using 2008 costs and assuming activity output remains the same (e.g., $600,000/600 = $1,000 per ton for hazardous waste). *Rounded

603

17–16 Concluded The unit cost reductions: Luxury Model: $0.65 – $0.33 = $0.32 per unit or $768,000 in total Standard Model: $2.77 – $1.22 = $1.55 per unit or $5,580,00 in total Both products appear to be cleaner than before the changes. The design decision cost an extra $3,000,000 in 2007 and an extra $600,000 in 2008. Thus, $3,600,000 was spent to produce an annual savings of $6,348,000. Of the costs for the new processes, only $200,000 appears to be a recurring expense. Furthermore, the raw materials cost is reduced as well (how much is not given). It appears to be an economically justifiable decision.

17–17 1. i 2. d

8. j 9. c

3. m

10. n

4. a

11. f

5. k 6. e

12. h 13. g

7. b

14. l

604

17–18 1.

The basic issue is which material should be used. Presumably, the functionality of the two designs is similar (for example, durability is not an issue). The weight of the polymer product is much less than the steel product and, therefore, uses less raw materials. This advantage, however, is counterbalanced by the very high recyclable advantage of steel. Only 0.5 pound appears to be lost, while almost all the polymer material is lost (through incineration). While incineration provides an energy source, it also uses up a nonrenewable raw material. Steel recycling keeps most of the nonrenewable raw material in play. The polymer design, though, does have a product use advantage. It causes less petroleum to be consumed per year than the steel product. It also uses less energy in the production stage. But whether this all offsets the recyclable advantage is unclear. The residue picture is also unclear. The polymer produces more gaseous residues but less solid residues. It would be interesting to know which of the two has the most environmental impact. For example, if the gaseous is more serious, then the contamination advantage could flow to the steel product. Other information that might be useful is the energy used to produce the raw materials.

605

17–18 Continued 2.

Life-cycle cost: Polymer Materials: $30 × 9 $15 × 20 Energy: Production: $0.50 × 135* $0.50 × 200* Product use: $0.70 × 66 $0.70 × 110 Contaminants: Gaseous: $100 × 0.4 $100 × 0.2 Solid: $40 × 0.6 $50 × 2.0 Incineration benefit Recycling benefit Total

Galvanized Steel

$270.00 $300.00 67.50 100.00 46.20 77.00 40.00 20.00 24.00 (2.00) — $445.70

100.00 — (20.00) $577.00

*Pounds × Kilowatt-hours per pound Strengths: This approach provides a single summary measure of the environmental effects. It values potential trade-offs. For example, cost may act as a surrogate for the relative importance of contaminants. If so, then the solid contaminants appear to weigh more than the gaseous. Weaknesses: It is sometimes difficult to estimate the value or cost of certain items. For example, the recycling benefit of $20 may understate the importance of this variable. Furthermore, the incineration benefit does not consider the permanent loss of a nonrenewable resource. In fairness, it should be mentioned that these problems are more significant when the cost difference between the two is small, which is not the case in this example.

606

17–18 Concluded 3.

Although product-use effects and disposal are not included, they do have environmental effects caused by the company. Furthermore, some of these costs, such as energy efficiency, are borne directly by the consumer. Reducing postpurchase costs decreases sacrifice for the customer and increases customer value and therefore may be the source of a competitive advantage. Customer demand for cleaner products may also be a good reason for paying attention to these costs. Finally, the costs are a signal of economic inefficiency and thus should prompt a search for more ecoefficiency.

4.

Given the cost difference of $131.30 ($577.00 – $445.70), the polymer design would be selected. The recyclable advantage is so understated that it would overcome this difference. The favorable cost trade-off for the contaminants is a significant factor in favor of the polymer unit.

17–19 1.

Ecoefficiency maintains that improving environmental performance will improve economic efficiency. Thus, the environmental dimension is a potential source of a competitive advantage, and it can be logically included as a perspective of the Balanced Scorecard.

2.

IF environmental engineers are hired and IF employees receive environmental training, THEN employee environmental capabilities will increase; IF employee environmental capabilities increase, THEN the manufacturing process and products will improve and a packaging improvement process can be created; IF packaging improvement occurs and processes and products are improved, THEN packaging materials will be reduced and residue releases will decrease; IF packaging materials are reduced and residue releases decrease, THEN environmental performance will improve; IF environmental performance improves, THEN environmental costs are reduced and environmental certification is achieved; IF environmental costs are decreased, THEN profits increase; IF environmental certification is achieved, THEN the product and company images improve; IF image improves, THEN market share will increase; IF market share increases, THEN revenues will increase; and IF revenues increase, THEN profits will increase.

607

17–19 Concluded 3. FINANCIAL

Decrease Costs

CUSTOMER

ENVIRONMENT

PROCESSES

LEARNING AND GROWTH

Reduce Residues

Increase Profits

Increase Revenues

Improve Image

Increase Market Share

Environ. Performance

Improve Products

Improve Processes

Training

Employee Capabilities

608

Reduce Packaging

Packaging Process

Hire Engineers

17–20 1. Hazardous Waste

Tons of Waste

60,000 50,000

50,000

48,000

46,000 40,000

40,000 30,000 20,000 10,000 0 2005

2006

2007

2008

Year

2.

2005: Hazardous Waste

20%

4% 4% 2%

Incinerated Treated Recycled Landfilled Injected 70%

609

17–20 Continued

2008: Hazardous Waste 9%

Incinerated Treated Recycled Landfilled Injected

37% 37%

9%

8%

In 2005, 90 percent of waste was disposed of using landfill and deep-well injections. In 2006, this has dropped to 46 percent, a significant improvement. 3.

Tons of Sulfates

Liquid Residues 120 100

100

92

81

80

73

60 40 20 0 2005

2006

2007

Year

610

2008

17–20 Concluded 4.

Cost in 2005: Hazardous waste: Incineration Treated Recycled Landfilled Injection Liquid residues Total cost

× × × × ×

2,000 2,000 1,000 35,000 10,000

$4,000 ×

100

× × × × ×

15,000 3,000 3,500 15,000 3,500

$4,000 ×

73

$70 $100 $10 $50 $60

= $ 140,000 = 200,000 = (10,000) = 1,750,000 = 600,000 $2,680,000 = 400,000 $3,080,000

Cost in 2008: Hazardous waste: Incineration Treated Recycled Landfilled Injection Liquid residues Total cost

$70 $100 $10 $50 $60

= $1,050,000 = 300,000 = (35,000) = 750,000 = 210,000 $2,275,000 = 292,000 $2,567,000

Environmental costs are reduced by $513,000 ($3,080,000 – $2,567,000). This is a good reduction, but it may be even more than indicated. The reason: future cleanup liabilities may also be reduced, and these savings are not factored into the analysis.

RESEARCH ASSIGNMENTS 17–21 Answers will vary.

17–22 Answers will vary.

611

612