McKay Chemical Company is based in the town of Swampton. Thecompany is Swampton's "economic lifeblood," generating annualincome of $100 million and employing nearly 75 percent of itsworkforce. McKay produces many hazardous wastes as by-products ofits manufacturing processes. Proper disposal of these by-productsin compliance with environmental regulations would cost McKay inexcess of $10 million per year. Rather than comply, McKay haschosen for two decades to dump its hazardous wastes in a field atthe outskirts of Swampton's city limits. For doing so, it pays afine of $100,000 per year. The following information also pertainsto McKay Chemical Company and the town of Swampton:
1. A reporter has threatened to expose McKay Chemical Company on a60-minute, prime-time television news program. The story couldresult in a national boycott of the company's products and fines ofup to $50 million. A boycott could reduce the company's income byas much as $25 million per year. However, the reporter has agreednot to air the story if McKay pays her a consulting fee of $1million per year.
2. The townspeople are becoming increasingly concerned that theillegal dumping may eventually pollute the groundwater and presenta serious health hazard. However, most are equally concerned thatif the company's practices are exposed, Swampton and itsinhabitants would face financial ruin.
3. The judge who hands down the $100,000 fine each year is also amajor shareholder of McKay Chemical Company and serves on its boardof directors. The town board invests the annual fine in ascholarship fund available on the basis of need to children ofMcKay's employees. Over the years, many of the scholarshiprecipients have gone on to become successful doctors, teachers,scientists, and other productive members of society.
Assume that you have just been appointed as the new chiefexecutive officer of McKay Chemical. You have been presented withthe facts described in this case, along with the followingincremental analysis performed by an assistant:
Pay the Consulting Fee Risk
Public Exposure Incremental Analysis Consultingfee $ (1,000,000 ) $ 1,000,000 Potential fines 0 $ (50,000,000 ) (50,000,000 ) Reduction in currentfines 0 100,000 100,000 Additional disposalcosts 0 (10,000,000 ) (10,000,000 ) Potential cost ofboycott 0 (25,000,000 ) (25,000,000 ) Net cost ofoptions $ (1,000,000 ) $ (84,900,000 ) $ (83,900,000 )
a. Identify anyshortcomings in the preceding incremental analysis. (Selectall that apply.)
McKay Chemical Company is based in the town of Swampton. Thecompany is Swampton's "economic lifeblood," generating annualincome of $100 million and employing nearly 75 percent of itsworkforce. McKay produces many hazardous wastes as by-products ofits manufacturing processes. Proper disposal of these by-productsin compliance with environmental regulations would cost McKay inexcess of $10 million per year. Rather than comply, McKay haschosen for two decades to dump its hazardous wastes in a field atthe outskirts of Swampton's city limits. For doing so, it pays afine of $100,000 per year. The following information also pertainsto McKay Chemical Company and the town of Swampton: |
| 1. | A reporter has threatened to expose McKay Chemical Company on a60-minute, prime-time television news program. The story couldresult in a national boycott of the company's products and fines ofup to $50 million. A boycott could reduce the company's income byas much as $25 million per year. However, the reporter has agreednot to air the story if McKay pays her a consulting fee of $1million per year. |
| 2. | The townspeople are becoming increasingly concerned that theillegal dumping may eventually pollute the groundwater and presenta serious health hazard. However, most are equally concerned thatif the company's practices are exposed, Swampton and itsinhabitants would face financial ruin. |
| 3. | The judge who hands down the $100,000 fine each year is also amajor shareholder of McKay Chemical Company and serves on its boardof directors. The town board invests the annual fine in ascholarship fund available on the basis of need to children ofMcKay's employees. Over the years, many of the scholarshiprecipients have gone on to become successful doctors, teachers,scientists, and other productive members of society. |
Assume that you have just been appointed as the new chiefexecutive officer of McKay Chemical. You have been presented withthe facts described in this case, along with the followingincremental analysis performed by an assistant: |
| Pay the Consulting Fee | Risk Public Exposure | Incremental Analysis | |||||||||
| Consultingfee | $ | (1,000,000 | ) | $ | 1,000,000 | ||||||
| Potential fines | 0 | $ | (50,000,000 | ) | (50,000,000 | ) | |||||
| Reduction in currentfines | 0 | 100,000 | 100,000 | ||||||||
| Additional disposalcosts | 0 | (10,000,000 | ) | (10,000,000 | ) | ||||||
| Potential cost ofboycott | 0 | (25,000,000 | ) | (25,000,000 | ) | ||||||
| Net cost ofoptions | $ | (1,000,000 | ) | $ | (84,900,000 | ) | $ | (83,900,000 | ) | ||
| a. | Identify anyshortcomings in the preceding incremental analysis. (Selectall that apply.) |
