Gliss Inc. is a small distributor of mechanical pencils. Gliss identifies its three major activities and cost pools as ordering, receiving and storage, and shipping, and it reports the following details for 2016:

Activity and cost pool details

			Quantity of	Cost per Unit
Activity		Cost Driver	Cost Driver	of Cost Driver
1.	Placing and paying for orders of pencil packs	Number of orders	900	$100 per order
2.	Receiving and storage	Loads moved	5,000	$60 per load
3.	Shipping of pencil packs to retailers	Number of shipments	1,500	$90 per

Operating income

		Total
Revenues		$2,250,000
Costs:
Purchase cost of pencils		1,000,000
Ordering costs		90,000
Receiving and storage		300,000
Shipping		135,000
Total costs		1,525,000
Operating income		$725,000
Per Unit
$9.00
4.00
0.36
1.20
0.54
6.10
$2.90

Addtional information

For 2016, Gliss buys 250,000 pencil packs at an average cost of $4 per pack and sells them to retailers at an average price of $9 per pack. Assume Gliss has no fixed costs and no inventories. For 2017, retailers are demanding a 6% discount off the 2016 price. Gliss's suppliers are only willing to give a 5% discount.

Gliss expects to sell the same quantity of pencil packs in 2017 as it did in 2016.

Required

If all other costs and cost-driver information remain the same, by how much must Gliss

reduce its total cost and cost per unit if it is to earn the same target operating income in 2017 as it earned in 2016 (and thereby earn its required rate of return on investment)?

Question content area bottom

Part 1

First determine the selling price to retailers in

2017.

The selling price per pack to retailers in 2017 is

.

Part 2

Now determine the purchase price per packs of pencils in

2017.

The purchase price per pack in 2017 is

.