CHAPTER 17

ENVIRONMENTAL COST MANAGEMENT

QUESTIONS FOR WRITING AND DISCUSSION
1. Firms are interested in environmental costing because the costs of complying with environmental regulation have increased and
because improving environmental performance 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 environmental consequences, resource consumption, and costs.
3. The six incentives, or causes, for ecoefficiency 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 environmental 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 environmental 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.

581

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 environmental resources being consumed by each
product.
9. Activity-based costing first identifies environmental activities and determines the cost
of each activity. Next, activity rates are computed. Finally, environmental costs are
assigned to each product based on their
consumption of individual environmental activities.
10.

The environmental cost per unit of product

signals two things. First, it indicates how
much opportunity exists for improving environmental and economic performance.
Second, it is a measure of the relative cleanliness 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 environmental improvements.

12.

The environmentally important life-cycle

stages of a product are resource extraction,
product manufacture, product use, and recycling and disposal.

13.

The three steps of life-cycle assessment are

inventory analysis, impact analysis, and improvement analysis. Inventory analysis specifies the materials and inputs needed and
the resulting environmental releases in the
form of solid, liquid, and gaseous residues.
Impact analysis assesses the envi-

ronmental effects of competing designs and

provides a relative ranking of those effects.
Improvement analysis has the objective of
reducing the environmental impacts revealed by the inventory and impact steps.
14.

15.

Life-cycle costing improves life-cycle assessment by assigning economic consequences to the environmental impacts identified in the inventory and impact steps.
Assessing the financial consequences allows competing designs to be compared on
a common measure, allowing an environmental ranking of competing designs.
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 performance can be the source of a competitive advantage.

16.

The five core objectives of the environmental perspective are: (1) to minimize the use
of hazardous materials; (2) to minimize the
use of raw or virgin materials; (3) to minimize energy requirements for production and
use of the product; (4) to minimize the release 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 materials are limited in quantity and are nonrenewable. For example, only a finite amount
of petroleum reserves exists. Thus, conserv-

582

ing their use ensures that future generations

will have access to them.
18.

Possible measures for minimizing the release of residues include pounds of toxic
materials, cubic meters of effluents, tons of
greenhouse gases produced, and percentage reduction of packaging materials.

19.

Agree. Assuming the concept of ecoefficiency is valid, then all environmental failure activities should be classified as nonvalueadded. These activities represent the consequences of inefficient production approaches, 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 degradation. This approach covers the entire
life cycle and affects products, processes,
materials, energy, and recycling.

21.

The value of financial measures of environmental performance is easy to identify: environmental improvements should produce
significant and favorable financial consequences. If ecoefficient decisions are being
made, then environmental costs should decrease as environmental performance improves. Examples of financial measures include 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.

EXERCISES
171
1.
2.
3.
4.
5.
6.
7.
8.

d
e
d
a
e
c
b
e

9.
10.
11.
12.

a
e
d
b

172
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 environmental impacts. Ecological and economic performance can and should be
complementary. Several factors support this view. First, customers are demanding cleaner products. Second, better employees prefer to work for environmentally clean firms. Third, environmentally responsible firms tend to capture 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, improving 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 environmental problems and fostering sustainable development ignores the role of ecoefficiency. If improving environmental performance improves economic efficiency, 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.

583

173
1.

External failure costs for the environmental model are made up of two categories: 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 possible to lower control costs. Thus, the optimal operating point from the firms
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 ecoefficiencyto make it an operable concept.

174
1.
2.
3.
4.
5.
6.
7.
8.

9.
10.
11.
12.
13.
14.
15.
16.

Prevention (SD)
Prevention (SD)
Internal failure (SD)
External failure (societal)
Detection (SD)
Prevention (SD)
Detection
External failure (societal)

584

Detection (SD)
External failure (societal)
Prevention (SD)
External failure (private)
Internal failure (SD)
Detection (SD)
Internal failure
Detection (SD)

175
1.

Lemmons Pharmaceuticals
Environmental Cost Report
For the Year Ended December 31, 2008
Environmental Costs
Prevention costs:
Environmental studies
Environmental training

240,000
150,000

Detection costs:
Testing for contamination
$ 1,200,000
Measuring contamination levels
120,000
Internal failure:
Treating toxic waste
Operating equipment
Maintaining equipment

$ 9,600,000
1,970,000
720,000

External failure:
Inefficient materials usage
Cleanup of soil
Totals

$ 2,400,000
3,600,000

390,000

Percentage*
0.33%

1,320,000

1.10

12,290,000

10.24

6,000,000
$20,000,000

5.00
16.67%**

*Of operating costs ($120,000,000)

**Rounded
2.

Relative percentages (rounded):

Prevention:
Detection:
Internal failure:
External failure:

0.33% / 16.67%
1.10% / 16.67%
10.24% / 16.67%
5.00% / 16.67%

= 2.00%
= 6.60%
= 61.40%
= 30.00%

This distribution reveals that the company is paying little attention to preventing and detecting environmental costs. To improve environmental performance, much more needs to be invested in the prevention and detection categories.

585

175
3.

Concluded

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 increase 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 included.

176
1.

Activity rates:
Packaging rate:
Energy rate:
Toxin release rate:
Pollution rate:

$5,400,000/5,400,000
$1,440,000/1,800,000
$720,000/3,600,000
$1,680,000/600,000

=
=
=
=

$1.00 per pound

$0.80 per kilowatt-hour
$0.20 per pound
$2.80 per machine hour

Unit cost:
Herbicide
Packaging:
$1.00 3,600,000
$1.00 1,800,000
Energy:
$0.80 1,200,000
$0.80 600,000
Toxin releases:
$0.20 3,000,000
$0.20 600,000
Pollution control:
$2.80 480,000
$2.80 120,000
Total
Unit cost per pound

Insecticide

$ 3,600,000
$ 1,800,000
960,000
480,000
600,000
120,000
1,344,000
$ 6,504,000
12,000,000
$
0.542

336,000
$ 2,736,000
30,000,000
$
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.

586

176

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 costthe
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 assigned to each product: $2,700,000 to the herbicide and $540,000 to the insecticide. 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 environmental costs are assigned. However, it is often difficult to estimate the societal costs, and many firms restrict their cost assignments to private costs.

177
1.

New activity rates:

Packaging rate:
Energy rate:
Toxin release rate:
Pollution rate:
Engineering rate:
Treatment rate:

$2,430,000/4,860,000
$960,000/1,200,000
$180,000/1,800,000
$1,680,000/600,000
$720,000/24,000
$486,000/4,860,000

= $0.50 per pound

= $0.80 per kilowatt-hour
= $0.10 per pound
= $2.80 per machine hour
= $30 per engineering hour
= $0.10 per pound

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

587

177

Continued

Unit cost:
Herbicide
Packaging and treatment:
$0.60 3,240,000
$0.60 1,620,000
Energy:
$0.80 800,000
$0.80 400,000
Toxin releases:
$0.10 1,500,000
$0.10 300,000
Pollution control:
$2.80 480,000
$2.80 120,000
Engineering:
$30 18,000
$30 6,000
Total
Unit cost per pound

Insecticide

$ 1,944,000
$

972,000

640,000
320,000
150,000
30,000
1,344,000
336,000
540,000
$ 4,618,000
12,000,000
$
0.3848**

180,000
$ 1,838,000
30,000,000
$
0.0613**

**Rounded
2.

Savings:

Before*
After
Total savings
Pounds
Unit savings

Herbicide
$ 6,504,000
4,618,000
$ 1,886,000
12,000,000
$
0.1572**

Insecticide
$ 2,736,000
1,838,000
$
898,000
30,000,000
$
0.0299**

Total
$9,240,000
6,456,000
$2,784,000

*See the solution to Exercise 17-6.

**Rounded
This illustrates that improving environmental performance can improve economic efficiency, consistent with the claims of ecoefficiency.

588

177

Concluded

3.

Excessive energy and materials usage and releasing toxins are external failure activities; operating pollution control equipment is an internal failure activity. 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 reduced environmental damage may also increase 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.

178
1.

Both use about the same quantity of primary raw materials; however, tallow is
a renewable resource, whereas petrochemical stocks are not. Thus, an environmental 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 favor of tallow, but only slightly (120 total kilowatt-hours versus 135 for petrochemicals). 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 contaminant. 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 tallow may preserve more petrochemical stocks for future generationswhy
use the petrochemical stock approach when it is unnecessary and it contributes to the depletion of a scarce resource?

589

178
2.

Continued

Environmental impact cost:

Petrochemical
Raw materials:
$0.40 990
$0.60 935
Water:
$0.50 56
$0.50 560
Energy:
$1.20 135
$1.20 120
Contaminants:
Air:
$500 9*
$500 9*
Liquid:
$60 7**
$60 5
Solid:
$20 87
$20 176
Cost per 1,000 kg

Tallow

396
$

561

28
280
162
144
4,500
4,500
420
300
1,740
$ 7,246

3,520
$ 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. Using 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 contaminants. Further, there is a societal benefit from using tallow instead of petrochemicals 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.

590

178
3.

Concluded

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 materials 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 maintenance, recycling, and disposal. These factors are also significant issues.
The biodegradability of the surfactants, for example, is something that ought
to be explored.

179
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:
In dollars:

0.5 250,000,000 = 125,000,000 ounces saved or

125,000,000/16 = 7,812,500 pounds of packaging materials saved
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

591

179

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 incineration (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 product ties up the land and creates potential contamination (e.g., methane gas released 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.

1710
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.

Minimize release of residues

Minimize hazardous materials
Maximize opportunities to recycle
Minimize energy requirements
Minimize raw or virgin materials
Minimize release of residues
Maximize opportunities to recycle
Minimize release of residues
Minimize hazardous materials
Minimize raw or virgin materials
Minimize release of solid residues (also raw materials)
Minimize release of residues
Maximize opportunities to recycle

592

1711
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 perspective 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 infrastructure 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 classified as a detection cost.

3.

Number of Registrations

ISO 14001 Registrations

30
24

25
20

15

15
9

10
5

0
2005

2006

2007

Year
Registrations

593

2008

1711 Continued
Energy Consumption
3,050
3,000

3,000
2,950

BTUs

2,950

2,900

2,900

2,850

2,850
2,800
2,750
2005

2006

2007

2008

Year
BTU (in billions)

Greenhouse Gases
41,000
40,000

40,000
39,000

Tons

39,000

38,000

38,000
37,000

36,000

36,000
35,000
34,000
2005

2006

2007

Year
Gases (in tons)

594

2008

1711 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 concerned with all core objectives.

1712
1.
Cost Trend as a Percentage of Sales
0.14

Costs/Sales

0.12

0.12
0.1

0.10

0.08

0.08

0.07

0.06
0.04
0.02
0.00
2005

2006

207

2008

Year

Costs/Sales

There appears to be a favorable trade-off between prevention and detection

activities and failure activities. Ecoefficiency seems to be working.

595

1712 Concluded
2.

Normalized Energy Consumption

12,500

BTUs/Sales

12,000

12,000

11,800

11,500
11,000

10,545

10,500

10,364

10,000
9,500
2005

2006

2007

2008

Year
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 normalized. The 13.63 percent is a more meaningful measure because it reflects
the need to increase energy consumption as output increases.

596

PROBLEMS
1713
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 importance of prevention in the ecoefficiency model (remind students of the 1-10100 rule).
Environmental costs:

Corporate level: prevention

Auditor fees: prevention and detection

Environmental engineering: a cost that likely would be split among activities 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

597

1713 Concluded
2.

Ozone-depleting substances: pounds (tons) released; objective: minimize release of residues

Hazardous waste disposal: tons of residues landfilled; objective: minimize hazardous waste

Hazardous waste materials: pounds (tons) produced; objective: minimize hazardous waste

Nonhazardous waste disposal: tons sent to landfills; objective: minimize 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 reducing the weight, less landfill is required, reducing the solid waste. Increasing the recyclability also reduces solid waste and demand for raw materials.
Finally, if the packaging can be incinerated, it may produce energy and reduce 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 reductions in failure costs should exceed the costs of prevention. That is, it is
more efficient to be environmentally responsible.

598

1714
1.

2.

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

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 years ($960,000) plus this
years ($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 ecoefficiency: improving environmental performance improves economic efficiency.

599

1715
1.

Avade Company
Environmental Financial Statement
For the Year Ended December 31, 2008
Environmental benefits:
Income:
Recycling income ...........................................................
Increased sales ..............................................................
Current savings:
Cost reductions, hazardous waste ...............................
Cost reductions, contaminant releases .......................
Cost reductions, scrap production ..............................
Cost reductions, pollution equipment .........................
Energy conservation savings .......................................
Remediation savings .....................................................
Reduced insurance and finance costs .........................
Ongoing savings:
Cost reductions, hazardous waste ...............................
Cost reductions, contaminant releases .......................
Cost reductions, scrap production ..............................
Cost reductions, pollution equipment .........................
Energy conservation savings .......................................
Remediation savings .....................................................
Total benefits ............................................................

600

$ 200,000
1,600,000
800,000
1,200,000
200,000
640,000
144,000
880,000
640,000
400,000
800,000
200,000
400,000
144,000
800,000
$9,048,000

1715 Concluded
Environmental costs:
Prevention:
Designing processes and products
Training employees
Detection:
Measuring contaminant releases
Inspecting processes
Internal failure:
Producing scrap
Operating pollution equipment
External failure:
Disposing of hazardous waste
Releasing air contaminants
Using energy
Remediation
Total costs
2.

$ 800,000
320,000
560,000
640,000
1,000,000
1,040,000
400,000
2,000,000
1,152,000
1,520,000
$9,432,000

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 insurance 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.

1716
1.

Activity rates:
Hazardous waste:
Measurement:
Contaminants:
Scrap:
Equipment:
Designing:
Energy:
Training:
Remediation:

$2,400,000/2,400
= $1,000 per ton
$120,000/60,000
= $2 per transaction
$6,000,000/3,000
= $2,000 per ton
$2,100,000/600,000
= $3.50 per pound
$3,120,000/6,240,000 = $0.51 per hour
$600,000/24,000
= $25 per hour
$2,160,000/21,600,000 = $0.10 per BTU
$120,000/1,200
= $100 per hour
$4,800,000/240,000
= $20 per hour

601

1716 Continued
Unit cost calculation (2006):
Luxury Model
Hazardous waste:
$1,000 240
$1,000 2,160
Measurement:
$2 12,000
$2 48,000
Contaminants:
$2,000 300
$2,000 2,700
Scrap:
$3.50 300,000
$3.50 300,000
Equipment:
$0.50 1,440,000
$0.50 4,800,000
Designing:
$25 18,000
$25 6,000
Energy:
$0.10 7,200,000
$0.10 14,400,000
Training:
$100 600
$100 600
Remediation:
$20 60,000
$20 180,000
Total cost
Units
Unit cost

Standard Model

240,000
$

2,160,000

24,000
96,000
600,000
5,400,000
1,050,000
1,050,000
720,000
2,400,000
450,000
150,000
720,000
1,440,000
60,000
60,000
1,200,000
$5,064,000
2,400,000
$
2.11

3,600,000
$ 16,356,000
3,600,000
$
4.54*

*Rounded
The unit cost information provides an index of the environmental performance of each product. It thus can serve as a benchmark for evaluating subsequent efforts to improve environmental performance. The unit environmental cost also provides some indication as to where environmental
improvement activities should be focused.

602

1716 Continued
2.

2006 unit cost for the three relevant items:

Luxury Model
Hazardous waste:
$1,000 240
$1,000 2,160
Contaminants:
$2,000 300
$2,000 2,700
Equipment:
$0.50 1,440,000
$0.50 4,800,000
Total
Units
Unit cost

Standard Model

$ 240,000
$ 2,160,000
600,000
5,400,000
720,000
$1,560,000
2,400,000
$
0.65

2,400,000
$ 9,960,000
3,600,000
$
2.77*

Luxury Model

Standard Model

2008 unit cost for the three relevant items:

Hazardous waste:
$1,000 120
$1,000 480
Contaminants:
$2,000 150
$2,000 1,350
Equipment:
$0.50 720,000
$0.50 2,400,000
Total
Units
Unit cost

$ 120,000
$

480,000

300,000
2,700,000
360,000
$ 780,000
2,400,000
$
0.33*

1,200,000
$ 4,380,000
3,600,000
$
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

603

1716 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 decision 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 expense. Furthermore, the raw materials cost is reduced as well (how much is
not given). It appears to be an economically justifiable decision.

1717
1. i
2. d

8. j
9. c

3. m

10. n

4. a

11. f

5. k
6. e

12. h
13. g

7. b

14. l

604

1718
1.

The basic issue is which material should be used. Presumably, the functionality 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, therefore, 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 produces 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.

605

1718 Continued
2.

Life-cycle cost:
Polymer
Materials:
$30 9
$15 20
Energy:
Production:
$0.50 135*
$0.50 200*
Product use:
$0.70 66
$0.70 110
Contaminants:
Gaseous:
$100 0.4
$100 0.2
Solid:
$40 0.6
$50 2.0
Incineration benefit
Recycling benefit
Total

Galvanized Steel

$270.00
$300.00
67.50
100.00
46.20
77.00
40.00
20.00
24.00
(2.00)

$445.70

100.00

(20.00)
$577.00

*Pounds Kilowatt-hours per pound

Strengths: This approach provides a single summary measure of the environmental 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 importance of this variable. Furthermore, the incineration benefit does not consider
the permanent loss of a nonrenewable resource. In fairness, it should be mentioned that these problems are more significant when the cost difference between the two is small, which is not the case in this example.

606

1718 Concluded
3.

Although product-use effects and disposal are not included, they do have environmental effects caused by the company. Furthermore, some of these
costs, such as energy efficiency, are borne directly by the consumer. Reducing 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 inefficiency 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.

1719
1.

Ecoefficiency maintains that improving environmental performance will improve economic efficiency. Thus, the environmental dimension is a potential
source of a competitive advantage, and it can be logically included as a perspective of the Balanced Scorecard.

2.

IF environmental engineers are hired and IF employees receive environmental

training, THEN employee environmental capabilities will increase; IF employee 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 decrease, THEN environmental performance will improve; IF environmental performance improves, THEN environmental costs are reduced and environmental 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 increase; IF market share increases, THEN revenues will increase; and IF revenues increase, THEN profits will increase.

607

1719 Concluded
3.
FINANCIAL

Decrease
Costs

CUSTOMER

ENVIRONMENT

PROCESSES

LEARNING
AND
GROWTH

Reduce
Residues

Increase
Profits

Increase
Revenues

Improve
Image

Increase
Market Share

Environ.
Performance

Improve
Products

Improve
Processes

Training

Employee
Capabilities

608

Reduce
Packaging

Packaging
Process

Hire
Engineers

1720
1.
Hazardous Waste

Tons of Waste

60,000
50,000

50,000

48,000

46,000
40,000

40,000
30,000
20,000
10,000
0
2005

2006

2007

2008

Year

2.

2005: Hazardous Waste

20%

4% 4%
2%

Incinerated
Treated
Recycled
Landfilled
Injected
70%

609

1720 Continued

2008: Hazardous Waste

9%

Incinerated
Treated
Recycled
Landfilled
Injected

37%
37%

9%

8%

In 2005, 90 percent of waste was disposed of using landfill and deep-well injections. In 2006, this has dropped to 46 percent, a significant improvement.
3.

Tons of Sulfates

Liquid Residues
120
100

100

92

81

80

73

60
40
20
0
2005

2006

2007

Year

610

2008

1720 Concluded
4.

Cost in 2005:
Hazardous waste:
Incineration
Treated
Recycled
Landfilled
Injection
Liquid residues
Total cost

2,000
2,000
1,000
35,000
10,000

$4,000

100

15,000
3,000
3,500
15,000
3,500

$4,000

73

$70
$100
$10
$50
$60

= $ 140,000
=
200,000
=
(10,000)
= 1,750,000
=
600,000
$2,680,000
=
400,000
$3,080,000

Cost in 2008:
Hazardous waste:
Incineration
Treated
Recycled
Landfilled
Injection
Liquid residues
Total cost

$70
$100
$10
$50
$60

= $1,050,000
=
300,000
=
(35,000)
=
750,000
=
210,000
$2,275,000
=
292,000
$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: future cleanup liabilities may also be reduced, and these savings are not factored into the analysis.

RESEARCH ASSIGNMENTS
1721
Answers will vary.

1722
Answers will vary.

611

612