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FedEx
The organization that is being studied is FedEx Express. The company is involved in the overnight courier business, which involves collecting shipments from customers, sending those shipments through the company's extensive logistics network, and then delivering them the next day. There are a wide range of services that the company offers, but the easiest to analyze is the cost of sending envelopes that originate with foot couriers. FedEx can cost this activity in a couple of ways, but it appears that only the pickup side is built into the cost, while the delivery side is viewed as a fixed cost.
Foot couriers work exclusively in major downtown areas, and they deliver and pick up only envelopes. It is easier to do costing for foot couriers because they do not require trucks, so there are fewer cost inputs. The revenue...
The price for a single unit of service is dependent on a couple of different factors -- the destinations of pick up and delivery, and the speed of service requested. The first envelope will be priced as a pick up on Wall Street (zip 10005) with a delivery to South Beach in Miami (zip code 33139). This will be for 10:30 AM service. According to the FedEx website, this would cost $38.99. So this is the revenue component of the service.
The cost side of this equation is more difficult to ascertain. Delivery costs are reflective of the delivery station, so they are considered to be fixed costs associated with the total network. Those can be determined in the company's annual report, dividing the total fixed costs by the total number of packages handled. This would…
The variable cost would be factored on the basis on the pickup courier. So a foot courier working on Wall Street would pick up an average of 80 envelopes on his/her route. The foot courier makes an average of $15 per hour, depending on experience, plus another $2.50 per hour in benefits. The route takes four hours to complete (1pm-5pm). Thus, the total cost of this route would be $70, divided by 80 envelopes, for a variable cost per unit of 87.5 cents. There are also variable costs associated with the enveloped (5 cents) and stickers (1 cent). The total variable cost would therefore be 93.5 cents for each enveloped. The total contribution to fixed costs would be $38.99 - $0.935 = $38.055.
This is a fairly high contribution margin, but most of the company's costs per unit are fixed costs, associated with maintaining a vast global network of delivery couriers, aircraft, trucks and stations. The total operating expenses were $36.926 billion in FY 2011, and this was with 3.607 million packages per day. This gives the company fixed costs of $28.04 per package.
The breakeven point, given $38.055 as a contribution margin, is 970.333 million units per year, or 2.658 million units per day. Thus, while the foot courier only needs to pick up 1.8 envelopes to cover his/her costs, the company's high fixed costs mean that to turn a profit it needs to pick up the 2.658 million a day to break even at the price listed for the overnight enveloped from New York to Miami.
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