Laurie Manufacturing Pty Ltd., manufactures grass collection attachments for Lawn Mowers that are sold in the market. The income statement for 2018 indicated an operating loss of $420,000 details of which are given below:

Laurie Manufacturing Pty Ltd.

Sales (30,000 attachments @$500 each)

15,000,000

Fixed Costs

5,670,000

Variable Costs

9,750,000

Operating income

(420,000)

Mr Samuel (cost accountant) and Mr Martin, his assistant, have been asked by the owners of Laurie Manufacturing to see if there are ways to reduce costs. After some thinking and some analysis, Martin proposes to Samuel the following two options:

1. Option 1 - To reduce the variable costs by 70%, by procuring cheaper direct raw materials.

2. Option 2 - To reduce the company's variable costs by 60%, by reducing the costs it currently incurs for safe disposal of wasted plastic resulting from the manufacture of the grass collection attachments.

Samuel is concerned that this would expose Laurie Manufacturing to potential environmental liabilities. He requests Martin to factor into his analysis an estimation of potential environmental liabilities. Samuel responds by saying: "We are not violating any laws. There is some possibility that we may have to incur environmental costs in the future, but if we bring it up now, this proposal will not go through because the owners will always assume that these costs could be larger than they turn out to be. We may be in danger of the company closing down and costing our jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing."

REQUIRED:

1. Show calculations for break even revenues for 2018.

2. Show calculations to determine the break even revenues for 2018, if variable costs are at 70% and 60% of revenues as per options 1 and 2.

3. Show calculations to determine the operating income for 2018, if variable costs were at 70% and 60% of revenues as per options 1 and 2.

4. Evaluate Martin's comments in line with the ethical standards as advanced by the Institute of Management Accountants.

5. How would the non-inclusion of environmental costs impact Laurie Manufacturing in the future?