Consider the Socker Shoe situation in problem 35. Suppose Socker decided to locate a plant in Juarez, Mexico, which is also capable of producing 19,000 pairs of shoes per week. (It will therefore change the “Made in the USA” slogan to “Made in North America.”)
Mexican drivers’ wages and benefits are lower, a factor that has been taken into account in the following estimates of the shipping cost (per truckload) from Juarez to the warehouse distribution centers:
a. Suppose a tariff of $2 per pair of shoes from Mexico exists. If this plant were in operation, what is the effect on the production schedule for the week of February 14 given that production costs per shoe are the same for the Juarez plant as for the Tallahassee and Tucson plants?
b. Mexican production costs are substantially lower than U.S. costs, for both labor and material. Estimates indicate that overall production costs in Mexico are only 40% of U.S. costs. Currently, it costs roughly $5.00 to produce each pair of sneakers in the United States. Considering both the tariff costs and the savings in production costs, what would be the effect on the production schedule for the week of February 14?
c. Suppose that under union contract, Socker Shoe has agreed to produce at least 30,000 pairs of sneakers each week in the United States. Modify your formulation of part b and express the results in a transportation format. Solve for the optimal production and shipping schedule for the week of February 14.
d. Under the North American Free Trade Agreement (NAFTA), all tariffs between Mexico and the United States will be eliminated. At the same time, Mexican wages should rise. Assume that the increase in driver wages would add $400 per truckload to the figures given above. To what level (in terms of the percentage of U.S. production costs) would Mexican production costs have to rise for there to be no difference between producing all the units in the United States and producing some units in Mexico?