FedEx the Organization in Question Is FedEx

FedEx

The organization in question is FedEx Express, the overnight courier company. The company operates a global network for picking up and distributing packages and envelopes. Most of its major fixed assets are its stations, its aircraft and its fleets of vehicles. The company's business is highly correlated with the state of the global economy, and as a result FedEx must continually adapt its capacity in different regions according to the demand conditions in those regions. For example, the company has expanded significantly in China over the past twenty years, to meet the shipments of products to and from that country.

One recent decision that can be evaluated for costing is the decision to introduce the new Boeing 777F to the company's fleet. Adding new aircraft or vehicles to the fleet represents a significant challenge, because the maintenance department must have more parts, new training and possibly even new facilities to handle the maintenance related to the aircraft. However, the new aircraft increases capacity on the route for which it is designated. In this case, the route for the first 777F is Memphis-Stansted. The new plane will allow for more efficient transport of goods between the UK and the U.S. As well, the use of the new plane will allow FedEx to either cut the lease on the previous aircraft used on that route, or it will allow for those aircraft to be redeployed elsewhere.

Thus, there are a number of costs that are taken into consideration when making such a purchase. The first relevant cost is obviously the cost of the aircraft itself. The price of one of these aircraft ranges between $225 million (SC Digest, 2010). The second relevant cost is the cost associated with maintaining these new planes. This cost is more difficult to estimate, but perhaps is not a major cost anyway. It could be an incremental $100,000 per year per aircraft, and the total order is for 31 aircraft. Thus, the total incremental cost is an annual $3.1 million.

These costs must be weighed against the cost savings in order to determine the net present value of the project. For example, the new aircraft are said to use 18% less fuel than the previous aircraft. They also can go between China and the mainland U.S., and mainland Europe, without stopping to refuel. This will make FedEx more attractive than UPS, which is not buying the planes. While the uptick in sales and the reduction in fuel costs can be difficult to project, reasonable assumptions based on past experience and statistical analysis can be made by the company. Both are incremental to the decision at hand and therefore are considered relevant cash flows to the decision.

There are also a number of non-relevant costs. For example, the planes formerly used on those routes can now be redeployed to other routes. However, those planes could also be sold or FedEx could cancel the leases. Thus, there is a decision to be made with respect to the other planes, and that decision is independent of the decision to purchase the 777F. Therefore, whatever comes from the other aircraft is not relevant to the decision at hand.

Sunk costs are another category of non-relevant costs. FedEx has doubtless spent a lot of money investigating the aircraft, and indeed worked closely with Boeing on the development of the freight version of the 777 (SC Digest, 2010). These costs are not incremental to the decision to actually purchase the aircraft, so therefore should not be counted when evaluating the purchase decision. In addition to sunk costs, overhead costs are also not relevant. There are a number of overhead costs that are allocated on the basis of capacity, but these are not relevant. So for example, there are pilot costs. However, a pilot employed by FedEx is going to fly some sort of plane no matter whether it is a 777F or something else. So unless a new pilot needs to be hired, the cost of actually staffing these planes is not relevant to this decision.

With these inputs, the results seem to show -- at least according to FedEx's calculations -- that the new aircraft will have a positive net present value. The company believes that the combination of cost savings and increased revenues will cover the cost of the new aircraft. It is worth considering that there are fixed costs associated with the new maintenance structure. The more of these aircraft that FedEx purchases, the lower these fixed costs will be on a per aircraft basis.