McKay Chemical Company is based in the town of Swampton. The company is Swamptons economic lifeblood, generating

McKay Chemical Company is based in the town of Swampton. The company is Swampton’s “economic lifeblood,” generating annual income of $100 million and employing nearly 75 percent of its workforce. McKay produces many hazardous wastes as byproducts of its manufacturing processes. Proper disposal of these by-products in compliance with environmental regulations would cost McKay in excess of $10 million per year. Rather than comply, McKay has chosen for two decades to dump its hazardous wastes in a field at the outskirts of Swampton’s city limits. For doing so, it pays a fine of $100,000 per year. The following information also pertains to McKay Chemical Company and the town of Swampton:

1. A reporter has threatened to expose McKay Chemical Company on a 60-minute, prime-time television news program. The story could result in a national boycott of the company’s products and fines of up to $50 million. A boycott could reduce the company’s income by as much as $25 million per year. However, the reporter has agreed not to air the story if McKay pays her a consulting fee of $1 million per year.

2. The townspeople are becoming increasingly concerned that the illegal dumping may eventually pollute the groundwater and present a serious health hazard. However, most are equally concerned that if the company’s practices are exposed, Swampton and its inhabitants would face financial ruin.

3. The judge who hands down the $100,000 fine each year is also a major shareholder of McKay

Chemical Company and serves on its board of directors. The town board invests the annual fine in a scholarship fund available on the basis of need to children of McKay’s employees. Over the years, many of the scholarship recipients 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 chief executive officer of McKay Chemical. You have been presented with the facts described in this case, along with the following incremental analysis performed by an assistant:

Instructions
a. Identify any shortcomings in the preceding incremental analysis.
b. Draft a memorandum to the board of directors summarizing what you intend to do about this situation.

Transcribed Image Text:

Pay the Consulting Fee Risk Public Incremental ExposureAnalysis Consulting fee Potential fines Reduction in current fines. . Additional disposal costs Potential cost of boycott 串1,000,000 0 $(50,000,000 (50,000,000) 100,000 0 (10,000,000 10,000,000) 0 (25,000,000) (25,000,000 $(1,000,000) $(84,900,000) $(83,900,000) . $(1,000,000) 100,000 Net cost of options.