558811

CHAPTER 17 ENVIRONMENTAL COST MANAGEMENT

QUESTIONS FOR WRITING AND DISCUSSION

1. Firms are interested in environmental cost-ing because the costs of complying with en-vironmental regulation have increased and because improving environmental perfor-mance 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 environ-mental consequences, resource consump-tion, and costs.

3. The six incentives, or causes, for ecoeffi-ciency 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 envi-ronmental 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 environ-mental 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.

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 environ-mental resources being consumed by each product.

9. Activity-based costing first identifies envi-ronmental activities and determines the cost of each activity. Next, activity rates are com-puted. Finally, environmental costs are assigned to each product based on their consumption of individual environmental ac-tivities.

10. The environmental cost per unit of product signals two things. First, it indicates how much opportunity exists for improving envi-ronmental and economic performance. Second, it is a measure of the relative clean-liness 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 en-vironmental improvements.

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

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

558822

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

14. Life-cycle costing improves life-cycle as-sessment by assigning economic conse-quences to the environmental impacts iden-tified in the inventory and impact steps. Assessing the financial consequences al-lows competing designs to be compared on a common measure, allowing an environ-mental ranking of competing designs.

15. 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 perfor-mance can be the source of a competitive ad-vantage.

16. The five core objectives of the environmen-tal perspective are: (1) to minimize the use of hazardous materials; (2) to minimize the use of raw or virgin materials; (3) to minim-ize energy requirements for production and use of the product; (4) to minimize the re-lease 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 ma-terials are limited in quantity and are nonre-newable. For example, only a finite amount of petroleum reserves exists. Thus, conserv-

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

18. Possible measures for minimizing the re-lease of residues include pounds of toxic materials, cubic meters of effluents, tons of greenhouse gases produced, and percen-tage reduction of packaging materials.

19. Agree. Assuming the concept of ecoefficien-cy is valid, then all environmental failure ac-tivities should be classified as nonvalue-added. These activities represent the con-sequences of inefficient production ap-proaches, 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 de-gradation. This approach covers the entire life cycle and affects products, processes, materials, energy, and recycling.

21. The value of financial measures of environ-mental performance is easy to identify: envi-ronmental improvements should produce significant and favorable financial conse-quences. If ecoefficient decisions are being made, then environmental costs should de-crease as environmental performance im-proves. Examples of financial measures in-clude 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.

558833

EXERCISES

17–1

1. d 2. e 3. d 4. a 5. e 6. c 7. b 8. e

9. a 10. e 11. d 12. 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 environ-mental impacts. Ecological and economic performance can and should be complementary. Several factors support this view. First, customers are de-manding cleaner products. Second, better employees prefer to work for envi-ronmentally clean firms. Third, environmentally responsible firms tend to cap-ture 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, improv-ing 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 environmen-tal problems and fostering sustainable development ignores the role of ecoef-ficiency. If improving environmental performance improves economic effi-ciency, 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.

558844

17–3

1. External failure costs for the environmental model are made up of two catego-ries: 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 poss-ible 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. Prevention (SD) 2. Prevention (SD) 3. Internal failure (SD) 4. External failure (societal) 5. Detection (SD) 6. Prevention (SD) 7. Detection 8. External failure (societal)

9. Detection (SD) 10. External failure (societal) 11. Prevention (SD) 12. External failure (private) 13. Internal failure (SD) 14. Detection (SD) 15. Internal failure 16. Detection (SD)

558855

17–5

1. Lemmons Pharmaceuticals Environmental Cost Report

For the Year Ended December 31, 2008

Environmental Costs Percentage* Prevention costs: Environmental studies $ 240,000 Environmental training 150,000 $ 390,000 0.33%

Detection costs: Testing for contamination $ 1,200,000 Measuring contamination levels 120,000 1,320,000 1.10

Internal failure: Treating toxic waste $ 9,600,000 Operating equipment 1,970,000 Maintaining equipment 720,000 12,290,000 10.24

External failure: Inefficient materials usage $ 2,400,000 Cleanup of soil 3,600,000 6,000,000 5.00 Totals $20,000,000 16.67%**

*Of operating costs ($120,000,000) **Rounded 2. Relative percentages (rounded):

Prevention: 0.33% / 16.67% = 2.00% Detection: 1.10% / 16.67% = 6.60% Internal failure: 10.24% / 16.67% = 61.40% External failure: 5.00% / 16.67% = 30.00%

This distribution reveals that the company is paying little attention to prevent-ing and detecting environmental costs. To improve environmental perfor-mance, much more needs to be invested in the prevention and detection cat-egories.

558866

17–5 Concluded

3. 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 in-crease 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 in-cluded.

17–6

1. Activity rates:

Packaging rate: $5,400,000/5,400,000 = $1.00 per pound Energy rate: $1,440,000/1,800,000 = $0.80 per kilowatt-hour Toxin release rate: $720,000/3,600,000 = $0.20 per pound Pollution rate: $1,680,000/600,000 = $2.80 per machine hour

Unit cost: Herbicide Insecticide Packaging: $1.00 × 3,600,000 $ 3,600,000 $1.00 × 1,800,000 $ 1,800,000 Energy: $0.80 × 1,200,000 960,000 $0.80 × 600,000 480,000 Toxin releases: $0.20 × 3,000,000 600,000 $0.20 × 600,000 120,000 Pollution control: $2.80 × 480,000 1,344,000 $2.80 × 120,000 336,000 Total $ 6,504,000 $ 2,736,000 ÷ 12,000,000 ÷ 30,000,000 Unit cost per pound $ 0.542 $ 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.

558877

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 as-signed to each product: $2,700,000 to the herbicide and $540,000 to the insec-ticide. 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 environ-mental costs are assigned. However, it is often difficult to estimate the so-cietal costs, and many firms restrict their cost assignments to private costs.

17–7

1. New activity rates:

Packaging rate: $2,430,000/4,860,000 = $0.50 per pound Energy rate: $960,000/1,200,000 = $0.80 per kilowatt-hour Toxin release rate: $180,000/1,800,000 = $0.10 per pound Pollution rate: $1,680,000/600,000 = $2.80 per machine hour Engineering rate: $720,000/24,000 = $30 per engineering hour Treatment rate: $486,000/4,860,000 = $0.10 per pound

Note: Since pounds of packaging is the driver for both packaging and pack-aging 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.

558888

17–7 Continued

Unit cost: Herbicide Insecticide Packaging and treatment: $0.60 × 3,240,000 $ 1,944,000 $0.60 × 1,620,000 $ 972,000 Energy: $0.80 × 800,000 640,000 $0.80 × 400,000 320,000 Toxin releases: $0.10 × 1,500,000 150,000 $0.10 × 300,000 30,000 Pollution control: $2.80 × 480,000 1,344,000 $2.80 × 120,000 336,000 Engineering: $30 × 18,000 540,000 $30 × 6,000 180,000 Total $ 4,618,000 $ 1,838,000 ÷ 12,000,000 ÷ 30,000,000 Unit cost per pound $ 0.3848** $ 0.0613**

**Rounded 2. Savings: Herbicide Insecticide Total Before* $ 6,504,000 $ 2,736,000 $9,240,000 After 4,618,000 1,838,000 6,456,000 Total savings $ 1,886,000 $ 898,000 $2,784,000 Pounds ÷ 12,000,000 ÷ 30,000,000 Unit savings $ 0.1572** $ 0.0299**

*See the solution to Exercise 17-6. **Rounded

This illustrates that improving environmental performance can improve eco-nomic efficiency, consistent with the claims of ecoefficiency.

558899

17–7 Concluded

3. Excessive energy and materials usage and releasing toxins are external fail-ure activities; operating pollution control equipment is an internal failure ac-tivity. 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 re-duced environmental damage may also increase product and company im-ages, 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 envi-ronmental 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 fa-vor of tallow, but only slightly (120 total kilowatt-hours versus 135 for petro-chemicals). 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 contami-nant. 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 tal-low may preserve more petrochemical stocks for future generations—why use the petrochemical stock approach when it is unnecessary and it contri-butes to the depletion of a scarce resource?

559900

17–8 Continued

2. Environmental impact cost: Petrochemical Tallow Raw materials: $0.40 × 990 $ 396 $0.60 × 935 $ 561 Water: $0.50 × 56 28 $0.50 × 560 280 Energy: $1.20 × 135 162 $1.20 × 120 144 Contaminants: Air: $500 × 9* 4,500 $500 × 9* 4,500 Liquid: $60 × 7** 420 $60 × 5 300 Solid: $20 × 87 1,740 $20 × 176 3,520 Cost per 1,000 kg $ 7,246 $ 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. Us-ing 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 contami-nants. Further, there is a societal benefit from using tallow instead of petro-chemicals 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.

559911

17–8 Concluded

3. 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 mate-rials 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 main-tenance, 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: 0.5 × 250,000,000 = 125,000,000 ounces saved or 125,000,000/16 = 7,812,500 pounds of packaging materials saved

In dollars: 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

559922

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 incine-ration (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 prod-uct ties up the land and creates potential contamination (e.g., methane gas re-leased 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. Minimize release of residues b. Minimize hazardous materials c. Maximize opportunities to recycle d. Minimize energy requirements e. Minimize raw or virgin materials f. Minimize release of residues g. Maximize opportunities to recycle h. Minimize release of residues i. Minimize hazardous materials j. Minimize raw or virgin materials k. Minimize release of solid residues (also raw materials) l. Minimize release of residues m. Maximize opportunities to recycle

559933

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 pers-pective 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 in-frastructure 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 clas-sified as a detection cost.

3.

ISO 14001 Registrations

3

9

15

24

0

5

10

15

20

25

30

2005 2006 2007 2008

Year

Num

ber o

f Reg

istr

atio

ns

Registrations

559944

17–11 Continued

Energy Consumption

2,950

2,900

2,850

3,000

2,750

2,800

2,850

2,900

2,950

3,000

3,050

2005 2006 2007 2008

Year

BTU

s

BTU (in billions)

Greenhouse Gases

39,000

38,000

36,000

40,000

34,00035,00036,00037,00038,00039,00040,00041,000

2005 2006 2007 2008

Year

Tons

Gases (in tons)

559955

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 con-cerned with all core objectives.

17–12

1.

Cost Trend as a Percentage of Sales

0.12

0.1

0.080.07

0.000.020.040.060.080.100.120.14

2005 2006 207 2008

Year

Cos

ts/S

ales

Costs/Sales

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

559966

17–12 Concluded

2.

Normalized Energy Consumption

12,00011,800

10,54510,364

9,500

10,000

10,500

11,000

11,500

12,000

12,500

2005 2006 2007 2008

Year

BTU

s/Sa

les

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 nor-malized. The 13.63 percent is a more meaningful measure because it reflects the need to increase energy consumption as output increases.

559977

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 impor-tance of prevention in the ecoefficiency model (remind students of the 1-10-100 rule).

Environmental costs: • Corporate level: prevention • Auditor fees: prevention and detection • Environmental engineering: a cost that likely would be split among ac-

tivities 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

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17–13 Concluded

2. • Ozone-depleting substances: pounds (tons) released; objective: minim-

ize release of residues • Hazardous waste disposal: tons of residues landfilled; objective: minim-

ize hazardous waste • Hazardous waste materials: pounds (tons) produced; objective: minim-

ize hazardous waste • Nonhazardous waste disposal: tons sent to landfills; objective: minim-

ize 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 re-ducing the weight, less landfill is required, reducing the solid waste. Increas-ing the recyclability also reduces solid waste and demand for raw materials. Finally, if the packaging can be incinerated, it may produce energy and re-duce 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 re-ductions in failure costs should exceed the costs of prevention. That is, it is more efficient to be environmentally responsible.

559999

17–14

1. 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 2. 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 ecoeffi-ciency: improving environmental performance improves economic efficiency.

660000

17–15

1. Avade Company Environmental Financial Statement

For the Year Ended December 31, 2008

Environmental benefits:

Income: Recycling income ........................................................... $ 200,000 Increased sales .............................................................. 1,600,000 Current savings: Cost reductions, hazardous waste ............................... 800,000 Cost reductions, contaminant releases ....................... 1,200,000 Cost reductions, scrap production .............................. 200,000 Cost reductions, pollution equipment ......................... 640,000 Energy conservation savings ....................................... 144,000 Remediation savings ..................................................... 880,000 Reduced insurance and finance costs ......................... 640,000 Ongoing savings: Cost reductions, hazardous waste ............................... 400,000 Cost reductions, contaminant releases ....................... 800,000 Cost reductions, scrap production .............................. 200,000 Cost reductions, pollution equipment ......................... 400,000 Energy conservation savings ....................................... 144,000 Remediation savings ..................................................... 800,000 Total benefits ............................................................ $9,048,000

660011

17–15 Concluded

Environmental costs:

Prevention: Designing processes and products $ 800,000 Training employees 320,000 Detection: Measuring contaminant releases 560,000 Inspecting processes 640,000 Internal failure: Producing scrap 1,000,000 Operating pollution equipment 1,040,000 External failure: Disposing of hazardous waste 400,000 Releasing air contaminants 2,000,000 Using energy 1,152,000 Remediation 1,520,000 Total costs $9,432,000 2. 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 insur-ance 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: $2,400,000/2,400 = $1,000 per ton Measurement: $120,000/60,000 = $2 per transaction Contaminants: $6,000,000/3,000 = $2,000 per ton Scrap: $2,100,000/600,000 = $3.50 per pound Equipment: $3,120,000/6,240,000 = $0.51 per hour Designing: $600,000/24,000 = $25 per hour Energy: $2,160,000/21,600,000 = $0.10 per BTU Training: $120,000/1,200 = $100 per hour Remediation: $4,800,000/240,000 = $20 per hour

660022

17–16 Continued

Unit cost calculation (2006): Luxury Model Standard Model Hazardous waste: $1,000 × 240 $ 240,000 $1,000 × 2,160 $ 2,160,000 Measurement: $2 × 12,000 24,000 $2 × 48,000 96,000 Contaminants: $2,000 × 300 600,000 $2,000 × 2,700 5,400,000 Scrap: $3.50 × 300,000 1,050,000 $3.50 × 300,000 1,050,000 Equipment: $0.50 × 1,440,000 720,000 $0.50 × 4,800,000 2,400,000 Designing: $25 × 18,000 450,000 $25 × 6,000 150,000 Energy: $0.10 × 7,200,000 720,000 $0.10 × 14,400,000 1,440,000 Training: $100 × 600 60,000 $100 × 600 60,000 Remediation: $20 × 60,000 1,200,000 $20 × 180,000 3,600,000 Total cost $5,064,000 $ 16,356,000 Units ÷ 2,400,000 ÷ 3,600,000 Unit cost $ 2.11 $ 4.54*

*Rounded

The unit cost information provides an index of the environmental perfor-mance of each product. It thus can serve as a benchmark for evaluating sub-sequent efforts to improve environmental performance. The unit environmen-tal cost also provides some indication as to where environmental improvement activities should be focused.

660033

17–16 Continued

2. 2006 unit cost for the three relevant items:

Luxury Model Standard Model Hazardous waste:

$1,000 × 240 $ 240,000 $1,000 × 2,160 $ 2,160,000 Contaminants: $2,000 × 300 600,000 $2,000 × 2,700 5,400,000 Equipment: $0.50 × 1,440,000 720,000 $0.50 × 4,800,000 2,400,000 Total $1,560,000 $ 9,960,000 Units ÷ 2,400,000 ÷ 3,600,000 Unit cost $ 0.65 $ 2.77* 2008 unit cost for the three relevant items:

Luxury Model Standard Model Hazardous waste: $1,000 × 120 $ 120,000 $1,000 × 480 $ 480,000 Contaminants: $2,000 × 150 300,000 $2,000 × 1,350 2,700,000 Equipment: $0.50 × 720,000 360,000 $0.50 × 2,400,000 1,200,000 Total $ 780,000 $ 4,380,000 Units ÷ 2,400,000 ÷ 3,600,000 Unit cost $ 0.33* $ 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

660044

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 de-cision 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 ex-pense. 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 3. m 4. a 5. k 6. e 7. b

8. j 9. c 10. n 11. f 12. h 13. g 14. l

660055

17–18

1. The basic issue is which material should be used. Presumably, the functional-ity 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, there-fore, 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 pro-duces 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.

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17–18 Continued

2. Life-cycle cost: Polymer Galvanized Steel Materials: $30 × 9 $270.00 $15 × 20 $300.00 Energy: Production: $0.50 × 135* 67.50 $0.50 × 200* 100.00 Product use: $0.70 × 66 46.20 $0.70 × 110 77.00 Contaminants: Gaseous: $100 × 0.4 40.00 $100 × 0.2 20.00 Solid: $40 × 0.6 24.00 $50 × 2.0 100.00 Incineration benefit (2.00) — Recycling benefit — (20.00) Total $445.70 $577.00

*Pounds × Kilowatt-hours per pound

Strengths: This approach provides a single summary measure of the envi-ronmental 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 impor-tance of this variable. Furthermore, the incineration benefit does not consider the permanent loss of a nonrenewable resource. In fairness, it should be men-tioned that these problems are more significant when the cost difference be-tween the two is small, which is not the case in this example.

660077

17–18 Concluded

3. Although product-use effects and disposal are not included, they do have en-vironmental effects caused by the company. Furthermore, some of these costs, such as energy efficiency, are borne directly by the consumer. Reduc-ing 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 inefficien-cy 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 im-prove economic efficiency. Thus, the environmental dimension is a potential source of a competitive advantage, and it can be logically included as a pers-pective of the Balanced Scorecard.

2. IF environmental engineers are hired and IF employees receive environmental

training, THEN employee environmental capabilities will increase; IF em-ployee 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 de-crease, THEN environmental performance will improve; IF environmental per-formance improves, THEN environmental costs are reduced and environmen-tal 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 in-crease; IF market share increases, THEN revenues will increase; and IF reve-nues increase, THEN profits will increase.

660088

17–19 Concluded

3. FINANCIAL CUSTOMER ENVIRONMENT PROCESSES LEARNING AND GROWTH

Increase Revenues

Increase Profits

Decrease Costs

Increase Market Share

Improve Image

Reduce Packaging

Environ. Performance

Reduce Residues

Packaging Process

Improve Processes

Improve Products

Hire Engineers

Employee Capabilities

Training

660099

17–20

1.

Hazardous Waste

50,000 48,000 46,00040,000

010,00020,00030,00040,00050,00060,000

2005 2006 2007 2008

Year

Tons

of W

aste

2.

2005: Hazardous Waste

4% 4%

2%

70%

20%

IncineratedTreatedRecycledLandfilledInjected

661100

17–20 Continued

2008: Hazardous Waste

37%

8%9%

37%

9%IncineratedTreatedRecycledLandfilledInjected

In 2005, 90 percent of waste was disposed of using landfill and deep-well in-

jections. In 2006, this has dropped to 46 percent, a significant improvement. 3.

Liquid Residues

10092

8173

020406080

100120

2005 2006 2007 2008

Year

Tons

of S

ulfa

tes

661111

17–20 Concluded

4. Cost in 2005:

Hazardous waste: Incineration $70 × 2,000 = $ 140,000 Treated $100 × 2,000 = 200,000 Recycled $10 × 1,000 = (10,000) Landfilled $50 × 35,000 = 1,750,000 Injection $60 × 10,000 = 600,000 $2,680,000 Liquid residues $4,000 × 100 = 400,000 Total cost $3,080,000 Cost in 2008:

Hazardous waste: Incineration $70 × 15,000 = $1,050,000 Treated $100 × 3,000 = 300,000 Recycled $10 × 3,500 = (35,000) Landfilled $50 × 15,000 = 750,000 Injection $60 × 3,500 = 210,000 $2,275,000 Liquid residues $4,000 × 73 = 292,000 Total cost $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: fu-ture cleanup liabilities may also be reduced, and these savings are not fac-tored into the analysis.

RESEARCH ASSIGNMENTS

17–21

Answers will vary.

17–22

Answers will vary.

661122