If Elmondo locates the warehouse in a foreign trade zone, how much will be saved in tariffs? Why?

FOREIGN TRADE ZONES

Elmondo, Inc., is considering opening a new warehouse to serve the Southwest region.

Jefferson Moore, controller for Elmondo, 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.). Jefferson estimates that the new warehouse will store imported merchandise costing about $3,450,000 per year.

Inventory shrinkage at the warehouse (due to breakage and mishandling) is about 4 percent of the total. The average tariff rate on these imports is 20 percent.

Required:

1. If Elmondo locates the warehouse in a foreign trade zone, how much will be saved in tariffs? Why?

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