Relevant Costs, Foreign Trade Zones Global Reach, Inc., is considering opening a
ID: 2556961 • Letter: R
Question
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 bene?t to his company, which imports about90 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 merchant dise costing about $16.78 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 5.5 percent. Required: 1. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved intariffs? Why? (Round your answer to the nearest dollar. )2. Suppose that, on average, the merchandise stays in a Global Reach warehouse for ninemonths 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? What will the total tariff-related savings be? (Round your answers to the nearest dollar. )3. Suppose that the shifting economic situation leads to a new tariff rate of 13 percent, and anew 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 shrink age 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? What will the total tariff-related savings be? (Round your answers to the nearest dollar. )
Explanation / Answer
Given, Value of imports = $ 16.78 million
Rate of Import Tax = 5.5%
Therefore, Savings in tariffs = 5.5% of $16.78 Million
= $ 0.9229 million
2. Total carry cost p.a. = 6% of the total merchandise
Total shrinkage of goods = 8%
Approx carry time before shipment of goods = 9 months
Therefore, Savings in carry cost due to warehouse :
Earlier cost = (16.78 * 8% )+ (16.78 *6% * 9/12) = $ 2.0975 million
New cost = (16.78 * 8%) = $1.3424 million {assuming no carry cost of 6% is incurred but shrinkage remains}
Therefore savings = $0.7551 million
Thus, total savings in tariff + carrycosts = 0.7551 + 0.9229
= $ 1.678 milion
3. New tariff = 13%
Carry cost = 6.5%
Shrinkage = 7%
Savings in carry cost = Old cost - new cost ={ (16.78*7%) + (16.78*6.5% * 9/12) } - (16.78*7%) { assuming shrinkage of home county is also reduced to 7% }
= $ 1.9926 - $1.1746
= $ 0.818 million
Savings in tariff = 16.78 * 13%
= $2.1814 milion
therefore, Total savings = 0.818+ 2.1814
= $ 2.9994 Million