At the end of 2001, Fargo Chemicals began to implement an environmental quality man¬

agement program. As a first step, it identified the following costs for the year just ended in its accounting records as environmentally related:

Required:
1. Prepare an environmental cost report by category. Assume that total operating costs are $10,000,000.
2. Calculate the relative distribution percentages for each environmental cost category (the percentage of the total environmental cost represented by each category). 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 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 cost $1,000,000, assuming the cleanup efforts are required within five years. To pay for the cleanup, annual contributions of $175,000 will be invested with the expectation that the fund will grow to $1,000,000 by the end of the fifth year.
Assume also that the loss of recreational opportunities is costing the local community $400,000 per year. How would this information alter the report in Requirement 1?

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2001 Inefficient material usage $200,000 Treating and disposing of toxic waste 800,000 Cleanup of chemically contaminated soil 300,000 Testing for contamination 100,000 Operating pollution control equipment 140,000 Maintaining pollution control equipment 60,000 Environmental studies 20,000 Verifying supplier environmental performance 10,000 Training (environmentally related) 12,500