At the end of 2008, Lemmons Pharmaceuticals (LP) implemented an environmental quality management program. As a first step, LP identified the following costs for the year just ended in its accounting records as environmentally related:
Inefficient materials usage
Treating and disposing of toxic waste
Cleanup of chemically contaminated soil
Testing for contamination
Operating pollution control equipment
Maintaining pollution control equipment
Performing environmental studies
Measuring contamination levels
Training (environmentally related)
1. Prepare an environmental cost report by category. Assume that total operating costs are $120,000,000.
2. Calculate the relative distribution percentages for each environmental cost cate- gory (the percentage of the total environmental cost represented by each cate- gory). Comment on the distribution.
3. Suppose that the newly hired environmental manager examines the report and makes the following comment: “This report understates the total environmental costs. It fails to consider the costs that we are imposing on the local community. For example, we have polluted the river and lake so much that swimming and fishing are no longer possible. I have heard rumblings from the local citizens, and I’ll bet that we will be facing a big cleanup bill in a few years.”
Assume that subsequent to the comment, engineering estimated that cleanup costs for the river and lake will amount to $12,000,000, assuming the cleanup is required within five years. To pay for the cleanup, annual contributions of
$2,100,000 will be invested with the expectation that the fund will grow to
$12,000,000 by the end of the fifth year. Assume, also, that the loss of recre- ational opportunities is costing the local community $4,800,000 per year. How would this information alter the report in Requirement 1?