At the beginning of the year, Lombardi Company initiated an environmental cost reduction program. To help assess the impact of the environmental cost reduction improvement program, the following data was collected for the current and preceding year: $\begin{array}{lrr}&\text { Freceding Year }&\text { Current Year }\
\text { Operating costs } & \$ 4,500,000 & \$ 4,500,000 \
\text { Designing products } & 3,000 & 4,500 \
\text { Auditing environmental activities } & 7,500 & 12,000 \
\text { Recycling scrap } & 60,000 & 45,000 \
\text { Disposing of toxic waste } & 120,000 & 75,000 \
\text { Testing for contamination } & 15,000 & 30,000 \
\text { Cleaning up oil spills } & 105,000 & 82,500
\end{array}$ For the current year, external failure costs are what percentage of operating costs?
A)2.67%
B)1.83%
C)1.38%
D)0.93%

Question

Quizplus · Accepted Answer

External failure costs include costs associated with disposing of toxic waste and cleaning up oil spills. For the current year, these are $75,000 (disposing of toxic waste) + $82,500 (cleaning up oil spills) = $157,500. To find the percentage of operating costs, divide $157,500 by the operating costs of $4,500,000 and multiply by 100. $\frac{157,500}{4,500,000} \times 100 = 3.5%$. However, given the options provided, it seems there might have been a misunderstanding in the calculation or the options provided. Re-evaluating the categories that are considered external failure costs according to standard definitions should correct this. Typically, external failure costs are those incurred after the product has been delivered to the customer, which would include costs like warranty repairs, returns, and liability claims, but in the context of environmental costs, it would more accurately include costs directly impacting the environment outside of the company's processes, such as cleaning up oil spills. However, without typical external failure costs like warranty repairs or returns in the provided data, and based on the given options, it appears there might be a need to reassess which costs are categorized as external failures or an error in the initial calculation or interpretation of the question.

At the Beginning of the Year, Lombardi Company Initiated an Environmental