Relevant Costs, Foreign Trade Zones

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 85 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 $15.4 million per year. Inventory shrinkage at the warehouse (due to breakage and mishandling) is about 9 percent of the total. The average tariff rate on these imports is 4.5 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 6 percent per year. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? Enter your answers in whole dollars and not in million of dollars. $

What will the total tariff-related savings be? 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 11.5 percent, and a new carrying cost of 6.5 percent per year. To combat these increases, Global Reach has instituted a total quality program emphasizing reducing shrinkage. The new shrinkage rate is 8 percent. Given this new information, if Global Reach locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? Enter your answers in whole dollars and not in million of dollars. $

What will the total tariff-related savings be? Enter your answers in whole dollars and not in million of dollars. $