Industrial Fluids, Ltd. (IFL) manufactures and sells fluids used by metal-cutting plants. These fluids enable metal-cutting to be done more accurately and more safely.
IFL has more than 1,000 customers. It is currently undertaking a customer profitability analysis. Arian Papandopolis, a newly hired accountant and MBA, is put in charge of the project. One cost relevant to her analysis is IFL’s liability for its customers’ fluid disposal. Papandopolis discovers that IFL may have responsibility under Canadian environmental legislation for the disposal of toxic waste by its customers. Moreover, she visits ten customer sites and finds dramatic differences in their toxic-waste handling procedures. She describes one site owned by Acme Metal as an “environmental nightmare about to become a reality.” She tells the IFL controller that even if they have only one-half of the responsibility for the cleanup at Acme’s site, they will still be facing very high damages. He is displeased at the news. Acme Metal has not paid its account to IFL for the past three months and has formally filed for bankruptcy. The controller cautions Papandopolis to be careful in her written report. He notes that “IFL does not want any smoking guns in its files in case of subsequent litigation.”
1. As Papandopolis prepares IFL’s customer profitability analysis, how should she handle any estimates of litigation and cleanup costs that IFL may be held responsible for?
2. How should Papandopolis handle the Acme Metal situation when she prepares a profitability report for this customer?