In 2006, Paula Nabors, president of Phelps, Inc., requested that environmental costs be assigned to the two major products produced by the company (two MP3 models: standard and luxury versions). She felt that knowledge of the environmental product costs would help guide the design decisions that would be necessary to improve environmental performance. The products represent two different models of MP3 (Standard and Luxury). The models use different processes and materials. To assign the costs, the following data were gathered for 2006:
|
Activity
|
LuxuryModel
|
Standard Model
|
Activity Cost
|
|
Disposing of hazardous waste (tons)
|
240
|
2,160
|
$ 2,400
|
|
Measuring contaminant releases (transactions)
|
12,000
|
48,000
|
120,000
|
|
Releasing air contaminants (tons)
|
300
|
2,700
|
6,000,000
|
|
Producing scrap (pounds of scrap)
|
300,000
|
300,000
|
2,100,000
|
|
Operating pollution equipment (hours)
|
1,440,000
|
4,800,000
|
3,120,000
|
|
Designing processes and products (hours)
|
18,000
|
6,000
|
600,000
|
|
Using energy (BTUs)
|
7,200,000
|
14,400,000
|
2,160,000
|
|
Training employees (hours)
|
600
|
600
|
120,000
|
|
Remediation (labor hours)
|
60,000
|
180,000
|
4,800,000
|
During 2006, Phelps produced 2,400,000 units of the luxury model and 3,600,000 units of the standard model.
Required
1. Using the activity data, calculate the environmental cost per unit for each model. How will this information be useful?
2. Upon examining the cost data produced in Requirement 1, an environmental engineer made the following suggestions: (1) substitute a new plastic for a raw material that appeared to be the source of much of the hazardous waste (the new material actually cost less than the contaminating material it would replace) and (2) redesign the processes to reduce the amount of air contaminants produced (at a cost of $3,000,000 in 2007 and $600,000 in 2008 with annual increase of recurring costs of $200,000 to maintain the new process).
As a result of the first suggestion, by 2008, the amount of hazardous waste produced had diminished to 600 tons, 120 tons for the Luxury Model and 480 tons for the Standard Model. The second suggestion reduced the contaminants released by 50 percent by 2008 (50 tons for the Luxury Model and 450 tons for the Standard Model). The need for pollution equipment also diminished, and the hours required for the Luxury Model and the Standard Model were reduced to 720,000 and 2,400,000, respectively. Calculate the unit cost reductions for the two models associated with the actions and outcomes described (assume the same production as in 2006). Do you think the efforts to reduce the environmental cost per unit were economically justified? Explain.