Environmental Cost Management Myers Manufacturing, Inc., wants to build a booth for painting the boxes it makes for small transformers to be used to power neon signs. The company can choose either a solvent-based or a powder paint process. The following table summarizes the costs and investment required by each approach:
|
Solvent Paint System
|
Powder Paint System
|
|
Initial investment
|
$400,000
|
$1,200,000
|
|
Unit paint cost
|
$0.19
|
$0.20
|
|
Estimated life in years
|
10
|
10
|
|
Annual units
|
2,000,000
|
2,000,000
|
The firm will incur additional environmental costs with the solvent paint system but not with the powder paint system. The firm estimates annual environmental costs for the solvent paint system as follows:
|
Units
|
Unit Cost
|
|
Monthly pit cleaning
|
12
|
$1,000
|
|
Hazardous waste disposal
|
183
|
3,000
|
|
Superfund fee
|
18,690
|
0.17
|
|
Worker training
|
2
|
1,500
|
|
Insurance
|
1
|
10,000
|
|
Amortization of air-emission permit
|
0.2
|
1,000
|
|
Air-emission fee
|
44.6
|
25
|
|
Recordkeeping
|
0.25
|
45,000
|
|
Wastewater treatment
|
1
|
50,000
|
The firm estimates its after-tax cost of capital to be 12 percent. Either system is a 10-year prop- erty under MACRS. The firm pays a total of 40 percent in income taxes.
Required:
1. What is the difference in cost in today's dollar for the two systems?
2. What is the most the firm is willing to pay for the powder-based system?
(Adapted from German Boer, Margaret Curtin, and Louis Hoyt, "Environmental Cost Management," Management Accounting [September 1998], pp. 28-38.)