At the end of 2001, Fargo Chemicals began to implement an environmental quality management program. As a first step, it identified the following costs for the year just ended in its accounting records as environmentally related:

2001 Inefficient materials 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 Performing environmental studies 20,000 Verifying supplier environmental performance 10,000 Training (environmentally related) 12,500 Required:

1. Prepare an environmental cost report by category. Assume that total operating De costs are $10,000,000.

Calculate the relative distribution percentages for each environmental cost cat- egory (the percentage of the total environmental cost represented by each cate- gory). Comment on the distribution.

Suppose that the newly hired environmental manager examines the report and makes the following comment: “This report understates the total environmen- tal costs. It fails to consider the costs that we are imposing on the local com- munity. For example, we have polluted the river and lake so much that swim- ming 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 amount to $1,000,000, assuming the cleanup is 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?