During a business downturn, a supply manager for RST, Inc.

The firm initially agreed to buy ethylene at $1000 per metric ton but renegotiated to $890 per metric ton after 3 months. For the first three months, the price difference is cost avoidance because the market price was $900 per metric ton, and the firm avoided paying this price. For the remaining nine months, the difference between the original contract price ($1000) and the renegotiated price ($890) represents a cost reduction.

Cost avoidance: (900 - 890) * 200 * 9 = $180,000

Cost reduction: (1000 - 890) * 200 * 9 = $198,000 Total savings: $264,000 cost reduction + $240,000 cost avoidance. References: Cost management principles in procurement, cost avoidance vs. cost reduction strategies.