Question

Global Reach, Inc., is considering opening a new warehouse to serve the Southwest region. Darnell Moore, controller for Global Reach, has been reading about the advantages of foreign trade zones. He wonders if locating in one would be of benefit to his company, which imports about 90 percent of its merchandise (e.g., chess sets from the Philippines, jewelry from Thailand, pottery from Mexico, etc.). Darnell estimates that the new warehouse will store imported merchandise costing about $16 million per year. Inventory shrinkage at the warehouse (due to breakage and mishandling) is about 8 percent of the total. The average tariff rate on these imports is 6.5 percent.

Required:

1. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved in tariffs? Enter your answers in whole dollars and not in million of dollars.
$

2. Suppose that, on average, the merchandise stays in a Global Reach warehouse for nine months before shipment to retailers. Carrying cost for Global Reach is 7 percent per year. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? (Round your answer to nearest dollar.) Enter your answers in whole dollars and not in million of dollars.
$

What will the total tariff-related savings be? (Round your answer to nearest dollar.) Enter your answers in whole dollars and not in million of dollars.
$

3. Suppose that the shifting economic situation leads to a new tariff rate of 13 percent, and a new carrying cost of 7.5 percent per year. To combat these increases, Global Reach has instituted a total quality program emphasizing reducing shrinkage. The new shrinkage rate is 7 percent. Given this new information, if Global Reach locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? (Round your answer to nearest dollar.) Enter your answers in whole dollars and not in million of dollars.
$

What will the total tariff-related savings be? (Round your answer to nearest dollar.) Enter your answers in whole dollars and not in million of dollars.
$

Answer 1

Since the Co. imports FTZ, it would save the costs relating to the import tariff @ 6.5% because merchandise of every description may be held in the foreign trade zone without being subject to tariffs (customs duties) and other ad valorem taxes. Given, Value of imports = $ 16 million 1 . 90% of its merchandise , if it opens a new warehouse in the Rate of Import Tax-6.5% Therefore, Savings in tariffs-65% of $16 Million $1.04 million

3. New tariff-13% carry cost 7.5% Shrinkage 7% Savings in carry cost-old cost-new cost-{(16*7%) + (16*7.5% * 9/12))-(16*7%) Assuming shrinkage of Home County is also reduced to 796) $ 2.02-$1.12 $ 0.9 million Savings in tariff 16 * 13% -$2.08 million Therefore, Total savings 0.9 2.08 $ 2.98 Million