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

For 2016, Gonzalo buys 250,000 pencil packs at an average cost of \($6\) per pack and sells them to retailers at an average price of \($8\) per pack. Assume Gonzalo has no fixed costs and no inventories. For 2017, retailers are demanding a 5% discount off the 2016 price.
Gonzalo’s suppliers are only willing to give a 4% discount. Gonzalo expects to sell the same quantity of pencil packs in 2017 as it did in 2016.
If all other costs and cost-driver information remain the same, by how much must Gonzalo 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)?

Transcribed Image Text:

Activity 1. Placing and paying for orders of pencil packs 2. Receiving and storage 3. Shipping of pencil packs to retailers Cost Driver Quantity of Cost Driver Cost per Unit of Cost Driver Number of orders Loads moved 500 $100 per order 4,000 $ 60 per load Number of 1,500 $ 80 per shipment shipments