SciFi Paperback Books is an Internet retailer of science fiction paperback books. Based on a sales vol- —_C ogt Reduction ume of 200,000 units, the projected net income for the current year is $700,000. The company has been (LO 4)

selling the books for an average of $15 each; unit-level costs consist of the $8 purchase cost and a $1 handling cost. SciFi’s annual committed facility and period costs are $500,000. SciFi’s books generally have a one-year product life.

Required

a. If SciFi desires a 20 percent return on sales, what cost reduction is required at the current year’s prices and costs?

b. What cost reduction is required if there are the following changes in next year’s costs and prices that result from taking no management actions, that is, maintaining the status quo:

5 percent decrease in sales price 20 percent increase in purchase cost