Chapter 14, Problem 24E

1.

To determine

 Compute the new cost per pound for each product.

Explanation of Solution

Environmental costs: Environmental costs are incurred due to poor environmental quality that may or may not exist.

Compute the new cost per pound for each product:

Figure (1)

Note:  Pounds of packaging is the driver for both packaging and packaging treatment, therefore the rates can be combined $\text{(\$0}\text{.60}\text{=}\text{\$0}\text{.50}\text{+}\text{\$0}\text{.10)}$.

Working notes:    

Calculate the activity rates:

Figure (2)

Note 1: Since pounds of packaging are the driver for both packaging and packaging treatment, $3,037,500 is the total costs associated with product Org AB and Org XY.

Note 2: Total engineering hours are 15,000 (11,250 for Org AB and 3,750 for Org XY).

(2)Calculate the new cost of activity-packaging materials:

$\begin{array}{c}\begin{array}{l}\text{New}\text{Cost of activity for }\\ \text{packaging materials}\end{array}\}\text{=}\left(\begin{array}{l}\text{Existing}\text{cost}\text{of}\text{packaging}\text{materials}-\\ \text{Decrease}\text{in}\text{packaging}\text{costs}\end{array}\right)\\ \text{=}\text{\$}\text{3,375,000}-\text{\$1,856,250}\\ \text{=\$1,518,750}\end{array}$

(3)Calculate the new cost of activity-Energy usage:

$\begin{array}{c}\text{New}\text{cost of activity-Energy usage}\text{=}\left(\begin{array}{l}\text{Existing}\text{cost}\text{of}\text{energy}\text{usage}-\\ \text{Decrease}\text{in}\text{cost}\text{of}\text{energy}\text{usage}\end{array}\right)\\ \text{=}\text{\$900,000}-\text{\$300,000}\\ \text{=\$600,000}\end{array}$

Note:$\text{\$300,000}\text{=}\text{\$900,000}\text{×}\frac{\text{1}}{\text{3}}$

(4)Calculate the new cost of activity-Toxin releases:

$\begin{array}{c}\text{New}\text{cost of activity-Releasing}\text{toxins}\text{=}\left(\begin{array}{l}\text{Decrease}\text{in}\text{cost}\text{of}\text{releasing}\text{emissions}-\\ \text{Existing}\text{cost}\text{of}\text{energy}\text{usage}\end{array}\right)\\ \text{=}\text{\$562,500}-\text{\$450,000}\\ \text{=\$112,500}\end{array}$

Note:$\text{\$562,500}\text{=}\text{\$450,000}\text{×}\frac{\text{125}}{\text{100}}$

(5)Calculate the cost of packaging materials for Org AB:

$\begin{array}{c}\text{New}\text{cost}\text{of}\text{packaging}\text{materials}\text{for}\text{Org}\text{AB}\text{=}\left(\begin{array}{l}\text{ExistingCost}\text{of}\text{packaging}\text{materials}-\\ \text{Amount}\text{of}\text{decrease}\text{in}\text{packaging}\text{materials}\end{array}\right)\\ \text{=}\text{\$2,250,000}-\text{\$225,000}\\ \text{=}\text{\$}\text{2,025,000}\end{array}$

Note:$\text{\$225,000}\text{=}\text{\$2,250,000}\text{×}\text{10\%}$

(6)Calculate the cost of packaging materials for Org XY:

$\begin{array}{c}\text{New}\text{cost}\text{of}\text{packaging}\text{materials}\text{for}\text{Org}\text{XY}\text{=}\left(\begin{array}{l}\text{Existing}\text{cost}\text{of}\text{packaging}\text{materials}\text{-}\\ \text{Amount}\text{of}\text{decrease}\text{in}\text{packaging}\text{materials}\end{array}\right)\\ \text{=}\text{\$1,125,000}\text{-\$112,500}\\ \text{=}\text{\$}\text{1,012,500}\end{array}$

Note:$\text{\$112,500}\text{=}\text{\$1,125,000}\text{×}\text{10\%}$

(7)Calculate the total costs associated with packaging materials for both products Org AB and Org XY:

$\begin{array}{c}\begin{array}{l}\text{The total costs associated }\\ \text{with packaging}\text{materials for both }\\ \text{products Org AB and Org XY}\end{array}\}\text{=}\left(\begin{array}{l}\text{New}\text{costs}\text{of}\text{packaging}\text{materials}\text{for}\text{product}\text{Org}\text{AB+}\\ \text{New}\text{costs}\text{of}\text{packaging}\text{materials}\text{for}\text{product}\text{Org}\text{XY}\end{array}\right)\\ \text{=}\text{\$2,025,000+\$1,012,500}\\ \text{=\$3,037,500}\end{array}$

(8)Calculate the cost of energy usage for Org AB:

$\begin{array}{c}\text{New}\text{cost}\text{of}\text{energy}\text{usage}\text{for}\text{Org}\text{AB}\text{=}\left(\begin{array}{l}\text{Existing}\text{Cost}\text{of}\text{energy}\text{usage}-\\ \text{Amount}\text{of}\text{decrease}\text{in}\text{energy}\text{usage}\end{array}\right)\\ \text{=}\text{\$750,000}-\text{\$250,000}\\ \text{=\$500,000}\end{array}$

Note: $\$250,000=\$750,000\times \frac{1}{3}$

(9)Calculate the cost of energy usage for Org XY:

$\begin{array}{c}\text{New}\text{cost}\text{of}\text{energy}\text{usage}\text{for}\text{Org}\text{XY}\text{=}\left(\begin{array}{l}\text{Existing}\text{Cost}\text{of}\text{energy}\text{usage}-\\ \text{Amount}\text{of}\text{decrease}\text{in}\text{energy}\text{usage}\end{array}\right)\\ \text{=}\text{\$375,000}-\text{\$125,000}\\ \text{=\$250,000}\end{array}$

Note:$\$125,000=\$375,000\times \frac{1}{3}$

(10)Calculate the total costs associated with energy usage for both products Org AB and Org XY:

$\begin{array}{c}\begin{array}{l}\text{The total costs associated }\\ \text{with}\text{energy}\text{usage}\text{for both }\\ \text{products Org AB and Org XY}\end{array}\}\text{=}\left(\begin{array}{l}\text{New}\text{costs}\text{of}\text{energy}\text{usage}\text{for}\text{product}\text{Org}\text{AB+}\\ \text{New}\text{costs}\text{of}\text{energy}\text{usage}\text{for}\text{product}\text{Org}\text{XY}\end{array}\right)\\ \text{=}\text{\$500,000+\$250,000}\\ =\$750,000\end{array}$

(11)Calculate the cost of toxin releases for Org AB:

$\begin{array}{c}\text{New}\text{cost}\text{of}\text{toxin}\text{releases}\text{for}\text{Org}\text{AB}\text{=}\left(\begin{array}{l}\text{Existing}\text{Cost}\text{of}\text{toxin}\text{releases}-\\ \text{Amount}\text{of}\text{decrease}\text{in}\text{toxin}\text{releases}\end{array}\right)\\ \text{=}\text{\$1,875,000}-\text{\$937,500}\\ \text{=\$937,500}\end{array}$

Note: $\text{\$937,500}\text{=}\text{\$1,875,000×}\text{50\%}$

(12)Calculate the cost of toxin releases for Org XY:

$\begin{array}{c}\text{New}\text{cost}\text{of}\text{toxin}\text{releases}\text{for}\text{Org}\text{XY}\text{=}\left(\begin{array}{l}\text{Existing}\text{Cost}\text{of}\text{toxin}\text{releases}-\\ \text{Amount}\text{of}\text{decrease}\text{in}\text{toxin}\text{releases}\end{array}\right)\\ \text{=}\text{\$375,000}-\text{\$187,500}\\ \text{=\$187,500}\end{array}$

Note: $\text{\$187,500}\text{=}\text{\$375,000×}\text{50\%}$

(13)Calculate the total costs associated with toxin releases for both products Org AB and Org XY:

$\begin{array}{c}\begin{array}{l}\text{The total costs associated }\\ \text{with}\text{toxin}\text{releases}\text{for both }\\ \text{products Org AB and Org XY}\end{array}\}\text{=}\left(\begin{array}{l}\text{New}\text{costs}\text{of}\text{toxin}\text{releases}\text{for}\text{product}\text{Org}\text{AB+}\\ \text{New}\text{costs}\text{of}\text{toxin}\text{releases}\text{for}\text{product}\text{Org}\text{XY}\end{array}\right)\\ \text{=}\text{\$937,500+\$187,500}\\ \text{=\$1,125,000}\end{array}$

2.

To determine

Compute the net savings produced by the environmental changes for each product in total and on a per-unit basis and explain whether this supports the concept of eco-efficiency.

Explanation of Solution

Eco-efficiency: Eco-efficiency is referred as the capability to produce competitively priced goods and services that satisfies the needs and wants of the customer while simultaneously decreasing undesirable environmental impacts.

Compute the net savings produced by the environmental changes for each product in total and on a per-unit basis:

Particulars	Org AB	Org XY	Total
Before	$4,065,000 (Refer to note)	$1,710,000 (Refer to note)	$5,775,000
After	2,886,250	$1,148,750	$4,035,000
Total savings (a)	$1,178,750	$561,250	$1,740,000
Pounds (b)	7,500,000	18,750,000
Unit savings  $\left(\frac{\text{a}}{\text{b}}\right)$	$0.1572	0.0299

Table (1)

Note: Refer to 23E for the value of amounts.

According to the above calculation, it is noted that eco-efficiency can be improved by improving environmental performance.

3.

To determine

Categorize the activities as prevention, detection, internal failure or external failure.

Explanation of Solution

Classify the activities:

Particulars	Classification
Excessive energy and materials	External failure
Releasing toxins	External failure
Operating pollution control equipment	Internal failure
Engineering	Prevention

Table (2)

4.

To determine

Explain the manner n which the environmental improvements can contribute for improving the competitive position of the company.

Explanation of Solution

• The reduced environmental damage may also enhance 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.
• Product and company reputation can be enhanced by reducing environmental damage, with the idea of attracting more number of customers. Other probable advantage that might contribute to a competitive advantage is by including a lower cost of insurance and lower cost of capital.