Revol Industries manufactures plastic bottles for the food industry. On average, Revol pays $76 per ton for its plastics. Revol's waste-disposal company has increased its waste-disposal charge to $57 per ton for solid and inert waste. Revol generates a total of 500 tons of waste per month.
Revol's managers have been evaluating the production processes for areas to cut waste. In the process of making plastic bottles, a certain amount of machine "drool" occurs. Machine drool is the excess plastic that drips off the machine between molds. In the past, Revol has discarded the machine drool. In an average month, 180 tons of machine drool is generated. Management has arrived at three possible courses of action for the machine drool issue:
1. Do nothing and pay the increased waste-disposal charge.
2. Sell the machine drool waste to a local recycler for $18 per ton.
3. Reengineer the production process at an annual cost of $55,000. This change in the production process would cause the amount of machine drool generated to be reduced by 50% each month. The remaining machine drool would then be sold to a local recycler for $18 per ton.
Requirements
1. What is the annual cost of the machine drool currently? Include both the original plastic cost and the waste-disposal cost.
2. How much would the company save per year (net) if the machine drool were to be sold to the local recycler?
3. How much would the company save per year (net) if the production process were to be reengineered?
4. What do you think the company should do? Explain your rationale.