FedEx Express Is the Overnight Courier Arm

FedEx Express is the overnight courier arm of FedEx Corporation. This is the core business for the firm, delivering packages in a number of time frames between almost any two points in the world. The business has high fixed costs in terms of trucks and aircraft, and is very labor intensive. Operating effectively requires that the company have stations located all over the world. The location and size of these stations has to be driven by demand. One of the areas that is growing the most rapidly is in China, so in 2010 FedEx undertook a major expansion of its Shanghai station near Hongqiao airport (FedEx, 2010). This project has a long life span, potentially upwards of 30 years for this expansion, assuming China maintains its economic strength.

There are several relevant costs that would go into this decision. A relevant cost is a cost that is directly incremental to the decision at hand. Costs that are for other decisions, or costs not affected by the decision at hand are not considered to be relevant costs. The first relevant cost would be the cost of the station expansion itself. This is the basic cost associated with building physical facility. The second relevant cost is the equipment that will be installed in the upgraded station. The upgrade will necessitate new equipment (conveyors, sorting machines, etc.) in order to process the increased flow of goods through the station.

A third relevant cost that should be considered is the increase in staff that will be required. The new station is going to require new people to work in it. Typically, the added employees would be considered as part of the upgrade to working capital, since they must be paid. This cost is also incremental to this station, because if the new capacity for this part of China comes from another city, like Hangzhou, Suzhou or Yangzhou, then the difference in labor costs would be an incremental cost, because labor in Shanghai is more expensive than labor in other Chinese cities.

There are non-relevant costs, however, and these cannot be considered in the decision-making process. One category of non-relevant costs is sunk costs. This means that the cost of the original station by the Hongqiao Airport cannot be counted in the cost of the expansion. This cost has already been incurred and that will not change regardless of the decision made here.

Another non-relevant cost would be the financing cost, for example if FedEx took out a loan and paid 10% interest to a local bank for the construction. Financing charges should be included in the discount rate, which reflects the opportunity cost of capital. Thus, to include this interest would be double-counting this financing cost and that is why it is non-relevant.