Chapter 15, Problem 15.27BE

Sustainability and process costing (Learning Objective 1)

Smigel Industries manufactures plastic bottles for the food industry. On average, Smigel pays $73 per ton for its plastics. Smigel’s waste-disposal company has increased its waste-disposal charge to $56 per ton for solid and inert waste. The company generates a total of 500 tons of waste per month.

Smigel’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, Smigel has discarded the machine drool. In an average month. 180 tons of machine drool are generated.

Management has arrived at three possible courses of action for the machine drool issue:

1. 1. Do nothing and pay the increased waste-disposal charge.
2. 2. Sell the machine drool waste to a local recycler for $11 per ton.
3. 3. Reengineer the production process at an annual cost of $70,000. This change in the production process would reduce the amount of machine drool generated by 60% each month. The remaining machine drool would then be sold to a local recycler for $11 per ton.

Requirements

1. 1. What is the annual cost of the machine drool currently? Include both the original plastics cost and the waste-disposal cost.
2. 2. How much would the company save per year (net) if the machine drool were to be sold to the local recycler?
3. 3. How much would the company save per year (net) if the production process were to be reengineered?
4. 4. What do you think the company should do? Explain your rationale.