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. 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.” 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. The environmentally important life-cycle stages of a
product are resource extraction, product manufacture, product use, and recycling
and disposal. 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-

11.

12.

13.

581
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. 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. 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. 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-

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. 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. 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. 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.

19.

15.

20.

16.

21.

17.

582
EXERCISES 17–1
1. 2. 3. 4. 5. 6. 7. 8. d e d a e c b e 9. 10. 11. 12. a e d b

17–2
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. 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.

2.

583
17–3
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. 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 firm’s
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 ecoefficiency—to make it an operable concept.

2.

17–4
1. 2. 3. 4. 5. 6. 7. 8. Prevention (SD) Prevention (SD) Internal failure (SD)
External failure (societal) Detection (SD) Prevention (SD) Detection External
failure (societal) 9. 10. 11. 12. 13. 14. 15. 16. Detection (SD) External failure
(societal) Prevention (SD) External failure (private) Internal failure (SD)
Detection (SD) Internal failure Detection (SD)

584
17–5
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 $ 390,000 Percentage* 0.33%

Detection costs: Testing for contamination $ 1,200,000 Measuring contamination

levels 120,000 Internal failure: Treating toxic waste Operating equipment
Maintaining equipment External failure: Inefficient materials usage Cleanup of soil
Totals *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% $ 9,600,000 1,970,000 720,000 $ 2,400,000 3,600,000

1,320,000

1.10

12,290,000

10.24

6,000,000 $20,000,000

5.00 16.67%**

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
17–5
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.

17–6
1. Activity rates: Packaging rate: Energy rate: Toxin release rate: Pollution rate:
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 $
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 Insecticide
$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

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
17–6
2.

Concluded

Excessive usage of materials and energy is classified as an external failure cost

(once too much is used, then customers and society bear the cost—the effect has
been “released” into the environment). 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.

3.

17–7
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
17–7

Continued
Herbicide Insecticide $ 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**
972,000

Unit cost: 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 **Rounded 2. 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 $ 1,944,000

Before* After Total savings Pounds Unit savings

*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
17–7
3.

Concluded

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). 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.

4.

17–8
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 generations—why use the petrochemical stock approach when it is unnecessary
and it contributes to the depletion of a scarce resource?

589
17–8
2.

Continued
Petrochemical Tallow $ 28 280 162 144 4,500 4,500 420 300 1,740 $ 7,246 3,520 $
9,305 561

Environmental impact cost: 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 $ 396

*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
17–8
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.

17–9
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
17–9
3.

Concluded

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). 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.

4.

17–10
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
17–11
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. 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.

2.

3.
ISO 14001 Registrations
Number of Registrations
30 25 20 15 10 5 0 2005 2006 2007 2008
3 9 15 24

Year Registrations

593
17–11 Continued
Energy Consumption
3,050 3,000 2,950
3,000 2,950 2,900 2,850

BTUs

2,900 2,850 2,800 2,750 2005 2006

2007

2008

Year BTU (in billions)

Greenhouse Gases
41,000 40,000 39,000
40,000 39,000 38,000 36,000

Tons

38,000 37,000 36,000 35,000 34,000 2005 2006

2007

2008

Year Gases (in tons)

594
17–11 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.

17–12
1.
Cost Trend as a Percentage of Sales
0.14 0.12
0.12 0.1 0.08 0.07

Costs/Sales

0.10 0.08 0.06 0.04 0.02 0.00 2005

2006 Year

207

2008

Costs/Sales

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

activities and failure activities. Ecoefficiency seems to be working.

595
17–12 Concluded
2.

Normalized Energy Consumption

12,500 12,000
12,000

11,800

BTUs/Sales

11,500 11,000 10,500 10,000 9,500 2005 2006 2007 2008

10,545 10,364

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 17–13
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
17–13 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
17–14
1. Environmental benefits: Ozone-depleting substances, cost reductions
Environmental costs: Engineering design 2. 2006 $960,000 1,280,000 2007 $1,600,000
640,000 2008 $2,560,000 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 year’s ($960,000) plus this year’s
($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
17–15
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 ............................................................ $ 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

600
17–15 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.

17–16
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
17–16 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 *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. $ 240,000 $ 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* 2,160,000 Standard Model

602
17–16 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 2008 unit cost for the
three relevant items: Luxury Model 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 $ 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* 480,000 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* Standard Model

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
17–16 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.

17–17
1. i 2. d 3. m 4. a 5. k 6. e 7. b 8. j 9. c 10. n 11. f 12. h 13. g 14. l

604
17–18
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
17–18 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 $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 Galvanized Steel

*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
17–18 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. 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.

4.

17–19
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
17–19 Concluded
3. FINANCIAL
Decrease Costs Increase Profits Increase Revenues

CUSTOMER

Improve Image

Increase Market Share

ENVIRONMENT

Reduce Residues

Environ. Performance

Reduce Packaging

PROCESSES

Improve Products

Improve Processes

Packaging Process

LEARNING AND GROWTH

Training

Employee Capabilities

Hire Engineers

608
17–20
1.
Hazardous Waste
60,000
50,000 48,000

Tons of Waste

50,000 40,000 30,000 20,000 10,000 0

46,000 40,000

2005

2006

2007

2008

Year

2.

2005: Hazardous Waste

4% 4% 2%

20%

Incinerated Treated Recycled Landfilled Injected

70%

609
17–20 Continued

2008: Hazardous Waste

9% 37% 37% 8%

9%

Incinerated Treated Recycled Landfilled Injected

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.
Liquid Residues
Tons of Sulfates
120 100 80 60 40 20 0 2005 2006 2007 2008
100 92

81

73

Year

610
17–20 Concluded
4. Cost in 2005: Hazardous waste: Incineration Treated Recycled Landfilled
Injection Liquid residues Total cost Cost in 2008: Hazardous waste: Incineration
Treated Recycled Landfilled Injection Liquid residues Total cost $70 $100 $10 $50
$60 $70 $100 $10 $50 $60

× × × × ×

2,000 2,000 1,000 35,000 10,000 100

$4,000 ×

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

$3,080,000

× × × × ×

15,000 3,000 3,500 15,000 3,500 73

$4,000 ×

= $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 17–21

Answers will vary.

17–22
Answers will vary.

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