Question:
ENVIRONMENTAL COSTING, ECOEFFICIENCY, AND COMPETITIVE ADVANTAGE
Coyle Pharmaceuticals produces two organic chemicals (Org AB, and Org XY) used in the production of two of its most wide-selling anti-cancer drugs. The controller and environmental manager have identified the following environmental activities and costs associated with the two products:
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Pounds produced
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7,500,000
|
|
18,750,000
|
|
Packaging materials (pounds)
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2,250,000
|
|
1,125,000
|
|
Energy usage (kilowatt-hours)
|
750,000
|
|
375,000
|
|
Toxic releases (pounds into air)
|
1,875,000
|
|
375,000
|
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Pollution control (machine hours)
|
300,000
|
|
75,000
|
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Costs of activities:
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|
|
|
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Using packaging materials
|
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$3,375,000
|
|
|
Using energy
|
|
900,000
|
|
|
Releasing toxins (fines)
|
|
450,000
|
|
|
Operating pollution control equipment
|
|
1,050,000
|
|
Suppose that Coyle's manager decides to launch an environmental performance improvement program. First, efforts were made to reduce the amount of packaging. The demand for packaging materials was reduced by 10 percent.
Second, a way was found to reuse the packaging materials. Usage of packaging materials changed from one time to two times. Both changes together saved $1,856,250 in packaging costs. Third, the manufacturing processes were redesigned to produce a reduced environmental load. The new processes were able to reduce emissions by 50 percent and private emission costs by 75 percent. The new processes also reduced the demand for energy by one-third. Energy costs were also reduced by the same amount. There was no change in the demand or cost of operating pollution control equipment.
The cost of implementing the changes was $753,750 (salaries of $450,000 for hiring six environmental engineers and $303,750 for treating the packaging materials so they can be reused). Engineering hours used for each process are 11,250 for the Org AB process and 3,750 for the Org XY process.
Required:
1. Calculate the new cost per pound for each product. Assume that the environmental reductions for each product are in the same proportions as the total reductions.
2. Calculate the net savings produced by the environmental changes for each product, in total, and on a per-unit basis. Does this support the concept of ecoefficiency?
3. Classify the activities as prevention, detection, internal failure, or external failure.
4. Describe how the environmental improvements can contribute to improving the firm's competitive position.