Orecal, Inc., is considering opening a new warehouse to serve the Southwest region. Jerrell Moore, controller for Orecal, 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%

of its merchandise (e.g., chess sets from the Philippines, jewelry from Thailand, pottery from Mexico). Jerrell estimates that the new warehouse will store imported merchandise costing about $1,200,000 per year. Inventory shrinkage at the warehouse (due to breakage and mis¬

handling) is about 6% of the total. Average tariff rate on these imports is 20%.

Required:

1. If Orecal locates the warehouse in a foreign trade zone, how much will be saved in tar¬

iffs? Why?

2. Suppose that on average, the merchandise stays in an Orecal warehouse for 7 months before shipment to retailers. Carrying cost for Orecal is 12% per year. If Orecal locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? What will the total tariff-related savings be?